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88–642 2003

PRESIDENT’S FISCAL YEAR 2004 BUDGET WITH AN

OFFICIAL OF THE U.S. DEPARTMENT OF THE

TREASURY

HEARING

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

FEBRUARY 4, 2003

Serial No. 108–3

Printed for the use of the Committee on Ways and Means

(

ii

COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

AMO HOUGHTON, New York 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

JENNIFER DUNN, Washington 

MAC COLLINS, Georgia 

ROB PORTMAN, Ohio 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

SCOTT MCINNIS, Colorado 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

ROBERT T. MATSUI, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

GERALD D. KLECZKA, Wisconsin 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

MAX SANDLIN, Texas 

STEPHANIE TUBBS JONES, Ohio 

Allison H. Giles, Chief of Staff

Janice Mays, Minority Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 

iii

C O N T E N T S 

Page 

Advisory of January 28, 2003, announcing the hearing ....................................... 2

WITNESS 

U.S. Department of the Treasury, Hon. John Snow, Secretary ........................... 6

(1)

PRESIDENT’S FISCAL YEAR 2004 BUDGET 

WITH AN OFFICIAL OF THE U.S. DEPARTMENT OF THE TREASURY 

TUESDAY, FEBRUARY 4, 2003

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, DC.

The Committee met, pursuant to notice, at 2:08 p.m., in room 

1100 Longworth House Office Building, Hon. Bill Thomas (Chairman of the Committee) presiding. 

[The advisory announcing the hearing follows:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721

January 28, 2003

No. FC–1

Thomas Announces Hearing on

President’s Fiscal Year 2004 Budget with an

Official of the U.S. Department of the Treasury

Congressman Bill Thomas (R–CA), Chairman of the Committee on Ways and 

Means, today announced that the Committee will hold a hearing on President 

Bush’s fiscal year 2004 budget proposals within the jurisdiction of the Committee. 

The hearing will take place on Tuesday, February 4, 2003, in the main Committee hearing room, 1100 Longworth House Office Building, beginning at 

2:00 p.m.

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be heard from an official of U.S. Department of the Treasury. However, 

any individual or organization not scheduled for an oral appearance may submit a 

written statement for consideration by the Committee and for inclusion in the printed record of the hearing. 

BACKGROUND: 

On January 28, 2003, President George W. Bush will deliver his State of the 

Union address in which he is expected to outline numerous budget and tax proposals. The details of these proposals are expected to be released on February 3, 

2003, when the President is scheduled to submit his fiscal year 2004 budget to the 

Congress. 

The Treasury Department plays a key role in many of the areas of the Committee 

on Ways and Means’ jurisdiction, including taxes and customs. 

In announcing the hearing, Chairman Thomas stated: ‘‘The President’s budget 

will include tax and other proposals related to Treasury Department functions within the jurisdiction of the Committee on Ways and Means. I look forward to receiving 

the President’s budget and discussing his proposals.’’

FOCUS OF THE HEARING: 

The Treasury official will discuss the details of the President’s budget proposals 

that are within the Committee’s jurisdiction. 

FORMATTING REQUIREMENTS: 

Each statement presented for printing to the Committee by a witness, any written statement 

or exhibit submitted for the printed record or any written comments in response to a request 

for written comments must conform to the guidelines listed below. Any statement or exhibit not 

in compliance with these guidelines will not be printed, but will be maintained in the Committee 

files for review and use by the Committee. 

1. Due to the change in House mail policy, all statements and any accompanying exhibits for 

printing must be submitted electronically to hearingclerks.waysandmeans@mail.house.gov, along 

with a fax copy to (202) 225–2610, in Word Perfect or MS Word format and MUST NOT exceed 

a total of 10 pages including attachments. Witnesses are advised that the Committee will rely 

on electronic submissions for printing the official hearing record. 

3

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. Any statements must include a list of all clients, persons, or organizations on whose behalf 

the witness appears. A supplemental sheet must accompany each statement listing the name, 

company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226–

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.

seats, please. 

Chairman THOMAS. If Members and guests could find their 

f Thank you. Good afternoon. We welcome Secretary Snow in his 

first appearance not only before the Committee on Ways and 

Means as Secretary of the U.S. Department of the Treasury, but 

also before the Congress. We look forward to hearing from you; 

and, more importantly in the long run, we look forward to working 

with you. 

The President has proposed an economic growth and jobs package among a number of other issues that are under the jurisdiction 

of this Committee. Our economy is on the right track, but clearly 

we need to act to increase individual income and encourage businesses to create jobs and entrepreneurs to take risks. I believe we 

must act soon. 

In recent times, taken tax action which has had a very positive 

fiscal impact. I believe that the Committee, if it is diligent in its 

work, can produce suggested changes to the Tax Code that may 

also have a considerable positive effect on the economy. 

To that end, the Chair would indicate to Members that the Chair 

intends to introduce legislation which would be the President’s proposal and do so prior to the end of February. The Chair then intends to hold hearings through the first 2 to perhaps 3 weeks of 

March. The Chair would extend to the Ranking Member and to all 

other Members suggestions as to who would be witnesses. Clearly, 

our intent here is to hear the pros, the cons, and the alternatives, 

so that we may move forward as a Committee. Then, by the end 

of March, mark up legislation that the Chair anticipates would go 

to the Floor and pass the Floor of the House of Representatives 

prior to the beginning of April. The Chair intends this kind of vigorous schedule for the purpose of making law, if possible, as soon 

in the calendar year of 2003 as possible. 

The other issues that will appear before us are obviously important. One of the things the President proposed is the consolidation 

and simplification of savings vehicles for Americans. We have had 

some significant bipartisan initiatives in that area, and I look forward to Members of this Committee and the Administration, especially in the Treasury, examining ways in which we can encourage 

all Americans to save more. 

4

Second, I do appreciate the Administration’s candor in declaring 

in their budget that the international tax regime known as FSC–

ETI, foreign sales corporation extraterritorial tax income, must be 

repealed and replaced with a simpler alternative in efforts to avoid 

trade retaliation and improve competitiveness for U.S. companies. 

By getting over the hurdle of the fact that it must be done creates 

an opportunity for us to shape much-needed legislation. 

Third, the budget recommends the use of health insurance tax 

credits as a way to help the growing number of uninsured Americans. We made headway in last year’s trade bill and are very interested to see how this approach might be more broadly applied. 

Further, I do want to acknowledge the ongoing changes at Treasury. This Secretary now heads a Department in transition. Formerly of the Treasury, the U.S. Customs Service has relocated to 

the U.S. Department of Homeland Security and the former Agency 

of Alcohol, Tobacco and Firearms, whose functions have now been 

split between the U.S. Department of the Treasury and the U.S. 

Department of Justice. We will want to monitor these changes, especially in hearing the successes of these transitions, as well as, 

where and if we are needed to help. 

Finally, Mr. Secretary, as a trustee of the Social Security and 

Medicare funds, we will be interested in your perspective on how 

we tackle the very serious demographic issue of resources versus 

needs or wants facing this country in these important programs. 

I now recognize the gentleman from New York, the Ranking 

Member, for any comments he may wish to make. 

[The opening statement of Chairman Thomas follows:]

Opening Statement of the Honorable Bill Thomas, Chairman, and a 

Representative in Congress from the State of California 

Good morning. We welcome John Snow in his first appearance before the Ways 

and Means Committee as the Secretary of the Treasury. We look forward to working 

with you. 

The President has proposed an economic growth and jobs package. Our economy 

is on the right track, but we must act to increase individual income and encourage 

businesses to create jobs and entrepreneurs to take risks. And we must act soon. 

I would also like to take note of several other proposals. The first is the consolidation and simplification of savings vehicles for Americans. This is a bold proposal 

that we look forward to learning more about. 

Secondly, I appreciate the Administration’s candor in declaring in their budget 

that the international tax regime—also known as FSC/ETI—must be repealed and 

replaced with a simpler alternative that will avoid trade retaliation and improve 

competitiveness for U.S. companies. 

Third, the budget recommends the use of health insurance tax credits as a way 

to help the growing number of uninsured Americans. We made headway on this 

front through last year’s trade bill, and are interested in seeing how this approach 

may be more broadly applied. 

Further, I would like to acknowledge the ongoing changes at Treasury. The move 

of the U.S. Customs Service to the Department of Homeland Security and the 

former agency, Alcohol, Tobacco and Firearms, whose functions are now split between Treasury and the Department of Justice. We will be interested in hearing 

about the success of these two transitions. 

Finally, as a trustee of Social Security and Medicare, we’ll be interested in your 

perspective on how we tackle the very serious demographic issues facing the country. 

I now recognize the newest Republican Member on our panel, Rep. Eric Cantor 

of Virginia, to introduce the newest Secretary of the Treasury . . . 

I now recognize the gentleman from New York, Mr. Rangel, for any opening statement he may have.

f

5

Mr. RANGEL. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary. As we had stated earlier, we do hope 

that we will begin to try to address some of the problems facing 

our Nation in a bipartisan way. We are certainly going to try to 

do this. 

We also recognize there was a time you shared our concern about 

the deficit, and we can appreciate the fact that the Administration 

obviously has a different view on that today. It does not go unnoticed that the suggested tax cut by the President and by you is 

moving the Nation away from getting revenues from dividends, 

that is, unearned revenues to the working class people. We have 

been accused of declaring class warfare, and I personally do believe 

that is exactly what we are going through as we see the people 

paying payroll taxes to Social Security and Medicare. These taxes 

are being used not to protect the Social Security system, but rather 

for a tax cut. 

We also have a concern, even though we are Federal legislators, 

about the impact this tax cut is going to have on our States and 

local governments. So, it is really surprising that, before we even 

know the cost of this war that appears to be eminent from our 

viewpoint, that we are talking about a $1.5 trillion tax cut which 

was similar to the one we addressed earlier, and the relationship 

between that tax cut and our ever-increasing deficit. 

So, I look forward to your testimony to see what optimistic spin 

you can give to this since most economists have agreed that, notwithstanding the size of our economy, that these deficits could 

prove to be devastating, especially as we look forward to the cost 

of the war that appears to be imminent. So, we look forward to 

working with you publicly and privately and hope we can reach 

some bipartisan agreement on the budget and the tax part of it. 

Thank you. 

Chairman THOMAS. I thank the gentleman. Mr. Secretary, on 

behalf of the Committee, I welcome you. On a more personal note, 

I would like to recognize the gentleman from Virginia for an introduction. 

Mr. CANTOR. Thank you, Mr. Chairman. I am delighted to welcome a fellow Virginian and my friend and my constituent, Secretary John Snow, to today’s hearing. 

Mr. Chairman, in the words of some of the country’s most respected editorial writers, there are few minds better than John 

Snow’s to help put America’s economic engine back on track. 

I think you will hear today that Mr. Snow holds sound fiscal 

views; and he is a proven leader, having served most recently for 

14 years as President and Chief Executive Officer of the Richmondbased CSX Railroad Company. In my view, the President could not 

have picked a better individual to lead the Treasury Department. 

Mr. Chairman, once again, thank you for allowing me to welcome 

the Honorable John Snow. It is my distinct pleasure. 

Chairman THOMAS. Mr. Secretary, any written testimony you 

have will be made part of the record. You can address this Committee in any way you see fit. I will tell the gentleman, you need 

to turn the microphone on. They are very, very uni-directional. You 

need to speak directly into it. 

6

STATEMENT OF THE HONORABLE JOHN SNOW, SECRETARY, 

U.S. DEPARTMENT OF THE TREASURY 

Mr. SNOW. Thank you very much, Mr. Chairman, Ranking 

Member Rangel, all Members. It is a pleasure to be here for my 

maiden testimony in this new role that I assumed just yesterday. 

I hope my knowledge will expand rapidly in the weeks and months 

ahead, but I must say you probably have me at a pretty good disadvantage today. 

Mr. Chairman, Ranking Member Rangel, distinguished Members 

of the Committee, I truly do welcome the opportunity to appear before you today to discuss the President’s budget for the 2004 fiscal 

year. 

Let me begin by offering some views on what I would regard as 

the essential background for the budget; and that, of course, is the 

state of the U.S. economy today and the President’s economic 

growth plan, which in my view promises to create lots of new jobs 

and good jobs, promises to accelerate America’s economic recovery, 

and to increase our growth for years to come, to put America on 

a higher growth path for the out years. 

As every American knows, whether from having lost a job, or 

knowing someone who has lost a job, or worrying about losing their 

job, the economy took a turn for the worse beginning sometime in 

the summer of 2000. I remember it well as I looked at the carload 

and container load and truckload numbers at my old company, and 

saw them take a precipitous downward move. 

By the time the President took office, there was a strong undercurrent running against the economy. The unprovoked and the unprecedented terrorist attacks of September 11 compounded a recession that by then was already well under way, while about that 

time we began to discover a series of abuses of trust of a major proportion by some corporate business leaders that slowed our economy and eroded confidence in our capital markets. 

In response to this confluence of adverse events, the President 

acted decisively and in a bipartisan fashion with the Congress. He 

took the steps necessary to protect a Nation that was shaken and 

a Nation that had at that point, a fragile economy. In 2001, when 

relief was needed, he signed the most sweeping tax relief in a generation. As evidence of the damage became clearer, he acted again 

in March 2002, to further bolster the economy, again with your 

help. 

These were precisely the right medicines at precisely the right 

time. These actions made the recession much shorter and shallower 

than it otherwise would have been. In fact, by most measures, the 

recession was the mildest since World War II. 

In the face of extreme adversity, our economy, like our Nation, 

remains resilient today. Despite a sequence of economic slowdown, 

attack on the homeland, war in Afghanistan, and weakened investor confidence, the economy is recovering. As the President has 

stated, we can and we must do better. Relative success is not 

enough. Too many Americans are out of work today, too many 

Americans are insecure about their future, and the economy is not 

accelerating as fast as it should. 

We must build on our proven strengths. We must continue to 

move toward policies that create more good jobs and raise the 

7

standard of living for all. As long as there are Americans who want 

a job and Americans who cannot find one, the economy, in my view, 

is not growing fast enough. That is why the President’s jobs and 

growth package is so important. Under the President’s proposal, 92 

million taxpayers and their families would receive a tax cut in 

2003. A typical family of four with two earners and a combined income of about $39,000 would get tax reductions of about $1,100—

and not just in 2003, but in every year thereafter, in each and 

every year thereafter. His plan will create hundreds of thousands 

of additional jobs by the end of this year and well over 1 million 

by the fourth quarter of next year. 

This package will not only help Americans return to our economic potential, it will increase it. It will take us to a higher level 

of potential, creating a more abundant future with more good jobs 

and rising real wages. I believe that is what everyone in this room 

and everyone across America wants to see happen. 

Before I turn to the budget, a word about deficits. We are concerned about deficits. We have to be. Deficits matter. They are 

never welcome. There are times such as these when they are unavoidable, particularly when we are compelled to address critical 

national needs. 

It is important to remember, and this is a key point, that even 

without the President’s economic growth and jobs package, without 

homeland security and the war on terrorism, without any of these, 

we would have deficits now. Are these deficits welcome? No. Are 

they understandable? Yes. 

The surpluses we enjoyed were the product of a strong economy, 

not a weak one. We will not return, we will never return to economic strength by taxing our economy when it is struggling, any 

more than we would increase our Nation’s security by failing to 

fund defense when we are threatened. The prescription for returning to balanced budgets, to getting on the right path, is straightforward: hold the line on spending and grow the economy. Give the 

economy the boost it needs. 

This is the direction the President has chosen. It is a course to 

create jobs that last, permanent jobs. We are not going to let terrorism and its effects bring our Nation or our economy to its knees. 

Finally, we should remember that the current deficits are small 

relative to the unique circumstances we face today and to the size 

of our economy as a whole. Even at their depth, they remain considerably below the typical levels following a recession over the last 

30 years, and they begin a pronounced improvement after next 

year and will be declining both in absolute terms and in relative 

terms. 

Clearly, we face new threats and challenges. Job creation and 

economic growth are keys not only to the near term but to our 

long-term success, as well. If we are to meet the threats of today 

and the challenge of tomorrow, we simply must have a strong economy. 

In fact, we must seek a higher level of prosperity than any we 

have known before, one which puts us on a higher growth path and 

one which unlocks the fullest potential and talents of the American 

people. That means encouraging hard work, rewarding hard work, 

and creating opportunities for all Americans to work. These are the 

8

values that have brought us to where we are today, and they are 

the ones that must lead us to a better tomorrow. We must also remember that our success and our example in this endeavor promises not only a brighter, better future for our people and our children, but for the rest of the world, as well. 

The jobs and growth package, our new initiatives to promote savings, to promote health care coverage, to promote charitable giving, 

to encourage responsible energy production and improved compliance measures for the Internal Revenue Service are also important 

parts of these budget initiatives. 

Mr. Chairman, I look forward to discussing that plan and the 

rest of the President’s budget with you today. Thank you very 

much. 

[The prepared statement of Mr. Snow follows:]

Statement of the Honorable John Snow, Secretary, U.S. Department of the 

Treasury 

Chairman Thomas, Ranking Member Rangel, and distinguished Members of the 

Committee on Ways and Means, I welcome the opportunity to appear before you 

today to discuss the President’s budget for fiscal year 2004. 

Let me begin by offering my views on the essential background for this budget: 

the United States economy and President Bush’s economic growth plan, which 

promises to create jobs, accelerate America’s economic recovery, and increase our 

growth for years to come. 

As every American knows by now—whether from having lost a job, knowing someone who has, or worrying about losing theirs—our economy took a turn for the 

worse beginning in the summer of 2000. By the time President Bush took office an 

undercurrent was running against the economy. The unprovoked and unprecedented 

terrorist attacks of September 11, 2001 compounded a recession that was well underway, while the discovery of serious abuses of trust by some corporate business 

leaders slowed our recovery from it. 

In response to this confluence of adverse events, President Bush led decisively. 

Acting with Congress in a bipartisan fashion, he took the steps necessary to protect 

a shaken Nation and a fragile economy. In 2001 when relief was needed, he signed 

the most sweeping tax relief in a generation. As evidence of the damage became 

clearer, he acted again in March 2002 to further bolster the economy. These were 

precisely the right medicine at precisely the right time. These actions made the recession shorter and shallower than it would have been. In fact, by most measures 

it was the mildest since World War II. 

In the face of extreme adversity, our economy, like our Nation, remains resilient. 

Despite a sequence of economic slowdown, attack on our homeland, war in Afghanistan, and weakened investor confidence, the economy is recovering. But as the 

President has stated, we can and must do better. Relative success is not sufficient. 

Too many Americans are out of work today, and too many Americans are insecure 

about their tomorrow. 

We must build on the proven strengths of our economy. We must continue to 

move towards policies that will create more good jobs and raise living standards for 

all. As long as there are Americans who want a job and can’t find one, the economy 

is not growing fast enough. That’s why President Bush’s jobs and growth package 

is so important. Under the President’s proposal, 92 million taxpayers and their families would receive a tax cut in 2003. A typical family of four with two earners making a combined $39,000 will receive a total of $1,100 in tax relief, compared to the 

taxes they paid in 2002, under the President’s plan—and not just this year, but in 

each and every year after. And his plan will create hundreds of thousand of additional jobs by the end of this year and well over a million more by the end of next 

year. 

The package will not only help America return to its economic potential, it will 

increase it, creating a more abundant future with more good jobs and rising real 

wages. I believe that is what everyone in this room and across America seeks. 

Before I turn to the budget, a word about deficits. Deficits matter. They are never 

welcome. But there are times, such as these, when they are unavoidable, particularly when we are compelled to address critical national needs. It is important to 

remember, even without the President’s economic growth and jobs package, homeVerDate jul 14 2003 10:07 Aug 19, 2003 Jkt 088642 PO 00000 Frm 00012 Fmt 6633 Sfmt 6621 E:\HR\OC\A642.XXX A642
9

land security, and the war on terrorism, we would have deficits now. Are these deficits welcome? No. Are they understandable? Yes. 

The surpluses we enjoyed were the product of a strong economy, not a weak one. 

We will not return to economic strength by taxing our economy when it is struggling, any more than we would increase our Nation’s security by failing to fund its 

defense when it is threatened. The prescription for returning to balanced budgets 

is straightforward: hold the line on spending and grow the economy. This is the direction the President has chosen: a course to create real jobs that last. We are not 

going to let terrorism and its effects bring either our Nation or our economy to its 

knees. 

Finally, we should remember that current deficits are small relative to our unique 

circumstances and to our economy as a whole. Even at their depth, they remain considerably below the typical levels following a recession over the last 30 years and 

they begin a pronounced improvement after next year. 

We face new threats and challenges. Job creation and economic growth are keys 

not only to our near-term but our long-term success as well. If we are to meet the 

threats of today and the challenges of tomorrow, we must have a strong economy. 

In fact, we must seek a higher level of prosperity for America than we have 

known—one which puts us on an even higher growth path, one which unlocks the 

fullest potential and talents of the American people. That means encouraging hard 

work, rewarding hard work, and creating the opportunities for work for all Americans. These are the values that brought America to where we are today and they 

are the ones that we must allow to lead us into the future. We must also remember 

that our success and our example in this endeavor promises not only a brighter, better future for our people and our children, but for the rest of the world as well. 

The Jobs and Growth Package, our new initiatives to promote savings, our proposal to promote health care coverage, to encourage charitable giving, and to promote responsible energy production, and improved compliance measures from the 

Internal Revenue Service are all important budget initiatives. Each of these is described in more detail in our request. 

The Treasury Department’s portion of the 2004 budget is nearly a third reduced 

from 2003, owing mainly to the separation of homeland security functions from the 

Treasury Department this year. Adjusting for that change, Treasury’s request is an 

increase of about 3.5% over last year’s request. 

Treasury’s budget request will allow us to build on our recent accomplishments 

and highlights our commitments to:

1. Fight the war against terrorist financing; 

2. Ensure that the tax system is fair for all Americans through a comprehensive 

compliance effort that includes high income taxpayers; 

3. Increase Treasury’s efficiency and effectiveness by streamlining operations; and 

4. Maintain the integrity of our Nation’s financial systems and currency.

I look forward to discussing that plan and the rest of the President’s budget with 

you today.

want Members to note that the Chair has placed himself on the 

Chairman THOMAS. Thank you very much, Mr. Secretary. I do 

f clock so that Members will be mindful of the time available to them 

and that we can expeditiously question the Secretary, and the 

questions would come from all Members of the Committee if time 

possibly permits. 

Mr. Secretary, your job prior to coming to this particular position 

is a very useful and important one because we often get wrapped 

up in academic discussions of effects. The President has proposed 

a number of changes to the Tax Code and you yourself recently 

used the phrase that those changes would have an effect ‘‘each and 

every year thereafter.’’ When dealing with tax changes, speaking 

perhaps more from your previous position than your current position, what is the impact of permanent versus temporary? 

Mr. SNOW. The difference, Mr. Chairman, between permanent 

and temporary is the difference between night and day. With permanent tax changes, businesses and individuals can plan for the 

10

future. They build into their current behavior the expectation of 

that higher aftertax income, greater disposable income that they 

will have in the future. If they are a business, they build into the 

business today the plans into the future for higher returns on their 

investments, higher net income. That leads them to invest more 

today. It leads consumers to consume more today. 

A critical feature of the President’s bill is the multi-year character of it, because it causes people today to begin to change their 

behavior today in ways that are helpful to the economy. 

Chairman THOMAS. Obviously, there are portions of the President’s plan that are more far-reaching than others. If you were to 

identify those that are most critical for permanence, which would 

you identify? 

Mr. SNOW. The package I think works as a whole, but the centerpiece of it is the acceleration of the tax rate reductions from 

2004 and 2006 to 2003, and the dividend provision. The dividend 

provision in my view is the real centerpiece of this legislation. It 

is good economics, it deals with a major distortion in economic behavior, and eliminating that distortion will promote long-term 

growth and will promote jobs and economic activity. 

Chairman THOMAS. Most often it has been said that, first of all, 

you want the changes and you want them to be permanent. We 

have, however, in the past and in the most recent tax bill made 

changes that were not permanent specifically in areas which allow 

business to make decisions today rather than tomorrow. The Chair 

would be the first to say that if we could make permanent changes 

in areas, especially of those depreciable assets of less than 5 years, 

it would be a giant stride forward. In the area of, for example, 

identifying small business as the President does in one of the sections of the Code, so-called section 179, what would be, if we are 

unable to make it permanent, a reasonable and appropriate timeframe to see behavior modified in the short term. With the intent 

to acquire equipment and workers to help stimulate the economy? 

Mr. SNOW. The longer, in my view, is always the better. Something like a 5-year timeframe would seem to make sense to me, to 

give businesses an opportunity to plan ahead and know it is going 

to be there. It is the permanency of the concept, that it is there and 

available, that causes businesses to respond. So, something along 

those lines. I think time periods are fairly arbitrary, Mr. Chairman. 

Chairman THOMAS. When we use the phrase ‘‘stimulus versus 

long-term growth,’’ in your opinion is it better to spend a greater 

amount of money now, notwithstanding the current budget situation, to lock in the longer term, than to save money and do it only 

for a short period of time? Where is the real savings? 

Mr. SNOW. I would strongly come down on the side of long-term 

growth, investing now for long-term growth. As you know, looking 

at the problems the country faces in the years ahead, the surest 

way for us to equip ourselves to deal with those issues, Medicare 

funding, Social Security funding, the flexibility to respond to international crises, that is best provided for with a strong and buoyant 

and large economy. 

Chairman THOMAS. I thank the gentleman. My time has expired. The gentleman from New York, does the Ranking Member 

wish to inquire? 

11

Mr. RANGEL. Thank you, Mr. Chairman. Welcome again, Mr. 

Secretary. Is it safe to say under the President’s proposal that the 

surplus in the Medicare Trust Fund and the Social Security Trust 

Fund will be completely wiped out? 

Mr. SNOW. No, Mr. Rangel, that would be a misstatement of the 

results of the President’s growth and tax plan. 

Mr. RANGEL. Well, the moneys that are being paid into the 

trust fund, they will not be in the trust fund. Would they not be 

transferred to the general fund? 

Mr. SNOW. Every penny of trust fund surplus will be credited 

to the trust fund. 

Mr. RANGEL. It will be credited, but it would be used—the actual money will be used to reduce taxes, would they not? 

Mr. SNOW. No, Mr. Rangel. The integrity of the Social Security 

system, the integrity of the Medicare system, remain. Ultimately, 

in a pay-as-you-go system, the integrity of that system depends 

upon the success of the economy. It is a pay-as-you-go system. 

Mr. RANGEL. I thought that the majority had convinced you 

that, in order to maintain the integrity of this system, the money 

would have to be placed in a lockbox. Do you remember that expression, a ‘‘lockbox?’’ That was supposed to protect the integrity of 

the system. Are you saying now we don’t need a lockbox to protect 

the integrity of the pay-as-you-go system? 

Mr. SNOW. No, I don’t think you do at all. The lockbox really 

comes down to paying down the Federal debt. This is the wrong 

time to be doing that. There are reasons, legitimate reasons, why 

we have a deficit today. We have a deficit primarily because we 

have come through a very significant recession and fall-off in revenues, Federal revenues, because of the collapse of the stock market, 

a period where options and bonuses and corporate compensation 

levels have dropped significantly. 

It was capital gains and bonuses and incentive compensation 

that pushed up in a surprising way the government revenues in 

the late nineties. I was as surprised as anyone else to see those 

government revenues go up, but they were really a direct reflection 

of the stock market, the buoyant stock market and options and incentive pay plans. 

Mr. RANGEL. Is the reform of the Social Security system as you 

understand it off of the agenda now? 

Mr. SNOW. No, I think the President is committed to reform of 

Social Security. 

Mr. RANGEL. The Office of Management and Budget (OMB) 

gave an estimate of $1 trillion in order to so call reform it, or some 

say privatize it. Would that estimate still exist today? 

Mr. SNOW. Mr. Rangel, I am not familiar with the number you 

are citing, but any reform of Social Security is going to require 

some infusion of some kind, higher savings rates within Social Security. Longer term, we have to find a way to sustain it, and that 

means more—that means some set of reforms that put it on a 

sounder financial footing. 

Mr. RANGEL. Have you given any consideration of the impact 

of the projected tax cuts on local and State governments, whether 

they should expect a reduced source of revenue as a result of this 

proposal? 

12

Mr. SNOW. I have looked at some analyses on that, Mr. Rangel, 

and the net of the reductions and the gains is about a wash from 

the numbers I have seen, maybe slightly positive. 

Mr. RANGEL. Have you heard from the Governors on this issue 

as to what they believe the impact would be on their tax systems? 

Mr. SNOW. No, I have not at this point. I have only been in office a day, though. 

Mr. RANGEL. I was under the impression there were some people there before you that may have shared their knowledge with 

you. We will look forward to working with you, Mr. Secretary, and 

I thank the Chairman for this time. 

Chairman THOMAS. I thank the gentleman for staying within 

the timeframe. The Chair now recognizes the gentleman from Illinois, Mr. Crane, if he wishes to inquire. 

Mr. CRANE. Yes, indeed. Mr. Secretary, congratulations and 

thank you for being here today. I look forward to working closely 

with you this year as we work to implement the President’s growth 

package, but I also want to express appreciation to you going back 

some years when you were Chairman of The Business Roundtable. 

I serve as Chairman of the Subcommittee on Trade, and you played 

a very key role in helping us get the passage of the North American Free Trade Agreement. It was a critically important piece of 

legislation, and you marshalling the troops out there in the business community was a very important act. 

I want to just make one question, but before getting into that, 

I did not realize you were from Toledo. When you were in high 

school, I was in the real estate business down in Toledo briefly for 

about half a year. I am sorry I missed seeing you back in those 

days. 

The one question I have is the President’s budget provides for 

the permanent extension of the tax relief that was included in the 

2001 tax cut. There are some who claim that the cost of permanently extending that tax relief would increase government debt 

and lead to higher interest rates in the future. Is that true, or is 

that not true, and why or why not? 

Mr. SNOW. Well, there would, of course, be some cost associated 

with making those tax changes permanent, but, for my money, 

there would be an even bigger economic cost associated with not 

making them permanent. Because by not making them permanent, 

we would—the tax on low-income families would go up 50 percent 

or some number like that. The marriage penalties would be restored, and the advantages of the child credit would be lost. 

I can’t give you the budget impact of making it permanent, but 

I think it is unthinkable that we would ever take tax rates up to 

that prior level. If the American business community or the citizens of the country ever thought the rates were going back to that 

level, I think we would have a disaster on our hands. 

Mr. CRANE. Well, thank you, Mr. Secretary. I look forward to 

working with you. I yield back the balance of my time. 

Chairman THOMAS. I thank the gentleman. Prior to recognizing 

the gentleman from California for the purpose of relinquishing his 

time, I understand, the Chair would urge Members to speak directly into the microphone. The Chair is in hopes of refurbishing 

the 1950 sound system that we have in this room prior to the end 

13

of this session. Similarly, as we had difficulty in hearing the Secretary initially, I do believe the audience as well as others would 

prefer to hear clearly what the Members have to say. 

With that, the Chair recognizes the gentleman from California, 

Mr. Stark. 

Mr. STARK. Thank you, Mr. Chairman. In the spirit of the newest Member of the Administration, I would like at this time to yield 

my time to the newest Member on our side of the aisle, the gentlewoman from Ohio, Ms. Tubbs Jones. 

Chairman THOMAS. Ms. Tubbs Jones, you are recognized for 5 

minutes. 

Ms. TUBBS JONES. I love you, Mr. Stark. Mr. Chairman, Secretary Snow, good afternoon. 

Mr. SNOW. Good afternoon. 

Ms. TUBBS JONES. In Ohio, our Republican Governor just re- leased a 2-year, $49.2 billion budget that he said contained very little good news. In fact, it contains $3 billion in tax increases. It includes tacking on an additional 5 percent sales tax onto services 

like dry cleaning, manicures, cable TV, life entertainment, and increases fees for hunting and fishing licenses. Many Ohioans would 

see their Medicaid coverage cut, food banks will no longer be able 

to count on State moneys, and other social services will suffer, 

which in turn will hurt the people that depend on those services 

most. 

In my congressional district in Cleveland, the Mayor just an- nounced a plan to raise $10 million by increasing most of the fees 

charged by the city, things such as birth certificates, building permits, housing inspections and taxicab licenses. Even with these increases Cleveland might not be able to match the cost of providing 

these services. 

The financial straits of Ohio and Cleveland are not unique. Most 

of the States and many of the major cities across this country are 

facing similar lean times and being forced to respond to this in cuts 

and services and increases in fees, just to barely keep their heads 

above water. 

I heard you say previously, sir, that you believe that the dividend 

tax cut would have a significant influence on assisting States and 

governments. Can you kindly tell me what impact the dividend tax 

cut has on the low-income housing tax credit, sir? 

Mr. SNOW. It is the tax package as a whole that I was referring 

to in saying that the effects are slightly positive from the analysis 

I have seen. That comes from the fact that the package as a whole 

induces growth, creates growth in the economy that would not be 

there otherwise, and that higher growth in the economy will generate additional State and local revenues. 

Ms. TUBBS JONES. Have you read then, sir, that in fact the 

dividend tax cut will in fact repeal the low-income housing tax 

credit? 

Mr. SNOW. I don’t think it repeals it. 

Ms. TUBBS JONES. Not in fact repeals, but in actuality will repeal it. 

Mr. SNOW. I have looked at that issue of the effect of the dividend on dividend exclusion on other tax-favored forms of investment, and I don’t think there—there may be some effect as people 

14

who now find equity investments are a little more attractive than 

they were before, or somewhat more attractive, will shift into equities and out of some other kinds of vehicles, but I don’t think it will 

be dramatic. 

Ms. TUBBS JONES. Let me say this, Mr. Secretary. I would appreciate if you would, since it is your first day, not guess about 

that, because I am hearing from people all across this country that 

the dividend tax cut will have a significant impact on low-income 

housing credit; and particularly in these days and times when 

housing is so important to so many Americans it would be important that you, as the Secretary of the Treasury, understand that. 

Let me move on. I only get 5 minutes, so I have to move very 

quickly. Let me ask you, sir, in the President’s budget, is there a 

line item for the cost of the war in Iraq? 

Mr. SNOW. I don’t believe there is. 

Ms. TUBBS JONES. Can you, sir, or have you in fact discussed 

this issue with the President of the United States, and can you say 

to the American public any guess or estimate or guesstimate on 

what that cost will be and the impact it will have on our economy, 

sir? 

Mr. SNOW. Of course, it is the President’s hope there will not 

be a war and that Saddam Hussein will give up the weapons of 

mass destruction in a peaceable way and abide by the U.N. resolution. So the plan, the hope, is to get Saddam Hussein to live by the 

international law, which would avoid a war. 

Ms. TUBBS JONES. I hate to cut you off, but I am almost out 

of time. Can you answer my question specifically? 

Mr. SNOW. Have I talked with the President of the United 

States about the cost of the war? No. 

Ms. TUBBS JONES. I asked you what was the cost of the war, 

sir. 

Mr. SNOW. I don’t know that there will be a war, so I don’t have 

an answer to that question. 

Chairman THOMAS. The Chair would indicate to any Member 

they may submit questions in writing. It is oftentimes, within the 

timeframe of the hearing, impossible to achieve full and complete 

answers. As to whether or not we are at war with Iraq, an answer 

to that may be supplied fairly quickly. Does the gentlewoman from 

Connecticut wish to inquire? 

Mrs. JOHNSON OF CONNECTICUT. Thank you, Mr. Chairman. 

Welcome, Mr. Snow. It is a pleasure to have you, Mr. Secretary. 

I just want to make a couple of comments, because 5 minutes is 

not time enough to lay on the table the questions that I have about 

some aspects of the President’s proposal. 

I do welcome the President having taken on one of the major concerns or one of the major issues that we must all be concerned 

about in the Tax Code. I don’t think it is the one I would have 

taken on first, but this Committee has had testimony from more 

than 2 years, I think the earliest testimony goes back 3 years, as 

to how the American Tax Code is literally pushing companies offshore. 

We have heard more about that last year. Our Tax Code is not 

only making us noncompetitive, it is motivating American compaVerDate jul 14 2003 10:07 Aug 19, 2003 Jkt 088642 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HR\OC\A642.XXX A642
15

nies to move abroad; and, almost worse than that, it is resulting 

in the majority of mergers between foreign and domestic companies, resulting in foreign ownership. 

The implications of that surge of foreign ownership over jobs, 

over where research and development is done, over where development takes place and over ultimate control of profits, is something 

I think ought to concern all of us. So, not only am I concerned 

about the World Trade Organization’s decision in regard to the way 

we tax foreign income and the necessity, as the Chairman noted in 

his opening remarks, for us to change that law, but I am also very 

concerned about the degree to which our Tax Code is making our 

biggest producers noncompetitive. If they die, so do little guys. 

So, I am pleased to see the President take on a serious issue like 

the double taxation of dividends. I am concerned the way the proposal is structured will actually eliminate the incentive for companies to participate in the low-income housing tax credit, which has 

been a primary mover of the building of high-quality, affordable 

rental housing. I am very much afraid it will impact the research 

and development tax credit, which is important to our companies 

in this international competitive environment. I am very concerned 

it will have an impact on the annuity industry, which has been a 

very good actor in giving people a way to provide retirement security for themselves to complement rather modest Social Security 

benefits. So, there are a lot of things I think we need to look closely 

at. 

I did want to say that this issue of competitiveness and whether 

or not our manufacturing sector is going to survive is very much 

on the top of my mind. I do believe if we don’t take some significant 

action in support of basic manufacturing, tool, die, precision machining in the very near future that we will not have the core manufacturing base that you need to defend yourselves or to have a 

strong economy. 

I have been meeting with producers extensively, and I am pretty 

conscious now and involved in the interrelationship between these 

competitive issues that this Committee has looked at in the last 

few years and their impact on the big actors, the steel decision’s 

impact on the little actors, and the really extraordinary fragility 

right now of small manufacturing in America. So, there are some 

priorities that I hold higher than eliminating the double taxation 

of dividends, though I understand in the long run we can’t be the 

only country in the world that double taxes dividends. 

Mr. SNOW. I appreciate those comments and look forward to discussing a number of those subjects with you. You make a number 

of very good points. 

The case for the dividend exclusion is almost overwhelming. 

Every other country—we have the highest tax on dividends of anybody but one other major country in the world. It leads to higher 

debt ratios than otherwise would be the case. Debt-to-equity ratios 

in America are higher than they otherwise would be. In a period 

when we are anxious to get good corporate governance, an essential 

element of good corporate governance is revealing to shareholders 

what the earning power is. You can’t fudge cash or cash dividends. 

16

You mentioned inversions. One aspect of making dividends not 

taxable, of course, is if it is not taxable, what is the point of trying 

to avoid it, and on and on. 

I have not met one economist who doesn’t say this makes good 

economic policy sense. I haven’t met one economist who does not 

say the current Tax Code encourages over-reliance on debt. I 

haven’t met one economist who has not said that this is good, 

sound, strong economic policy which promotes growth because it 

lowers the cost of equity capital. If it lowers the cost of equity capital, we will have more equity capital. You will have more of everything that you drop the price of. Having more equity capital means 

growing the economy a little faster, and that means jobs. 

Mrs. JOHNSON OF CONNECTICUT. Thank you. Our time has 

expired. 

Chairman THOMAS. Does the gentleman from California, Mr. 

Matsui, wish to inquire? 

Mr. MATSUI. Yes. Thank you very much, Mr. Chairman. Welcome, Secretary Snow. Thank you for your kindness. 

This is not part of my question, but I might add that I don’t 

know if it really does reduce the cost of capital in reference to the 

double tax of dividends elimination, because I think the Administration, irrespective of what one thinks about dividend deductions 

or the dividend non-taxability, it should really go to the corporation 

rather than the individuals. That would be the way to make sure 

that you would lower the cost of capital. The way you are doing it 

probably has very little impact on both the market—the stock market, that is—and obviously also on the cost of capital. That is an 

issue I will leave for another day. What I really want to get into, 

if I may, is the whole issue of deficits. 

I read your testimony, and I heard your testimony. On page 2, 

in the third paragraph, where you start ‘‘Before I turn to the budget, a word about deficits,’’ I just would like to randomly quote a few 

comments here. You say, ‘‘Deficits matter. They are never welcome.’’ Then you say again, ‘‘Are these deficits welcome? No. Are 

they understandable? Yes.’’ Then you say, ‘‘Finally, we should remember that current deficits are small relative to our unique circumstances and our economy as a whole.’’

Now I read your statement that you made in November, on November 13, 1995, in the Richmond Post Dispatch. You say, ‘‘Credible, sustainable reduction in Federal deficits leading to a balanced 

budget will bring major economic benefits.’’ Then you also state in 

that same article, ‘‘A balanced Federal budget is the best choice to 

ensure a bright future for the Nation’s economy.’’

Of course, Mr. Greenspan has said the same thing. He has stated, ‘‘History suggests that our abandonment of fiscal discipline will 

eventually push up interest rates, crowd out capital spending, 

lower productive growth and force harder choices in the future.’’

Now, the reason I find the 1995 Richmond Post Dispatch statement of yours rather interesting is because I really do believe you 

believe it. You are a businessperson. You know what makes the 

economy run. You know, obviously, about what makes the financial 

markets work. 

At that time, when you made that observation in your comment 

in the newspaper, the percentage of the Federal budget deficit in 

17

relation to the Gross Domestic Product (GDP) of the economy was 

2.2 percent. We were in 1995 on a trend line moving to reduce the 

deficit. There was a real effort by the President and by the Congress to reduce the budget deficit. 

What I see here is in the opposite direction. One, it doesn’t appear there is an effort to reduce the deficit. In fact, we just said 

we got a $308 billion deficit this year and we will have a $304 billion deficit next year and deficits for at least the next 5 years exceeding $1 trillion. In addition to that, the deficit for this year is 

not 2.2 percent as a relation to GDP, but it is 3 percent. So if it 

applied to 1995, when it was 2.2 percent of GDP, and now it is 3 

percent of GDP, why is it not a problem and it was a problem then? 

At that time, if you recall, we were moving out of recession as 

well. We were probably out of it, but we were still in a period of 

sluggish growth and it wasn’t really until about a year later that 

we actually saw the recovery truly take place. It seems to be inconsistent. I think you probably owe the American public a little better 

explanation than in a three paragraph statement about deficits. 

Mr. SNOW. Let me try and address that question. It is absolutely a fair and appropriate question. In the nineties, the early 

nineties up through 1995, I was quite concerned about the direction, and I am sure many of you were, that deficits were taking in 

the United States. We didn’t have a war. We had a reasonably 

strong economy by 1993 and 1994. 

Mr. MATSUI. If I may interrupt, I apologize, but you are not including in your numbers the war in your numbers, not the Iraqi 

war. 

Mr. SNOW. No, no, but we do have a war on terrorism. We have 

had a response to September 11, and we have had a dramatic falloff in Federal revenues, a dramatic fall-off. It fell off as unexpectedly as it began. I don’t think anybody foresaw the explosion of 

Federal revenues that began in, oh, the late nineties, 1997 and 

1998, as the stock market exploded and those options in that buoyant time began to pay off and incentive compensation paid off and 

we had a surge in Federal revenues like we had never seen before. 

That surge is gone. The economy has been through a rough 

patch. I think something like, oh, the sixties—Mitch Daniel will be 

here and have the charts to show this. Far and away the biggest 

part of this deficit is explained by the economic slowdown, fall-off, 

the combination of the fall-off in revenues because of the stock 

market and options and incentive compensation and the decline in 

Federal revenues as a consequence of the recession. 

So I think the circumstances are very different. I will agree with 

the basic premise. If we ever get to the point where financial markets foresee sizable deficits without fiscal discipline as a centerpiece of governmental policy, where those deficits are rising in absolute terms and as a percentage of GDP, the markets will respond. 

Chairman Greenspan is right. At some point, if that is where the 

market saw us going, they would exact a price in terms of higher 

interest rates. I am saying we are a long way from there now. We 

can manage these deficits, particularly because they are explained 

by urgent national priorities and because there is a commitment to 

have them shrink over time and go down, as I am confident they 

will. 

18

Chairman THOMAS. The gentleman’s time has expired. Does the 

gentleman from Michigan wish to inquire? 

Mr. LEVIN. Yes. So let me follow up, Mr. Secretary. Welcome. 

Like Mr. Matsui and I think everybody else, I read your testimony 

about deficits and your minimizing them. By the way, on dividends, 

you have never met or heard of an economist who disagrees with 

you. I will send you a list; and if you don’t mind, I will make it 

public because your statement is public. For anyone to think that 

there is a unanimous view of economists on this subject is really 

ignoring what a lot of economists have to say. 

Back to the deficit. You really minimize it. You indicate that historically the deficits are less than usually true; that the recession—

you tend to minimize the recession, at one point congratulating the 

President on his efforts that pulled us out of the recession, though 

I think we are still in it. Then you talk about the dramatic drop 

in receipts as if the recession wasn’t so mild. 

I want everybody to go back through history and look not at the 

rhetoric, if I might say so, but at the record. I think what one sees 

is that the deficit now, as Mr. Matsui has pointed out, is well above 

where they were when you made your comments in 1995. When 

you say they are headed down over a long period of time, or over 

the years ahead after next year, I think people are not being realistic, because so much of the expenditures aren’t included in these 

budget estimates, including the cost of a war if it occurs. 

I went back over the last 30 years in terms of deficits, and I hope 

everybody will look at them, deficits, in relationship to GDP. What 

one finds is that—we are talking about usually 1 percent, 2 percent 

of GDP, and then they go up. Often they go up not after a major 

recession like the sixties, where we are talking about the early sixties they were in 1 percent, nine-tenths of a percent. They go up 

in the eighties when there is a recession, but also when we had the 

supply-side economics tax cuts. Those deficits continued despite 

what were supposed to be sparked in terms of economic growth, 

and now we are back at it again. We had tax cuts a couple years 

ago, and the deficits are increasing. Now, the proposal is another 

$600 to $700 billion, plus the cost and interest, and you just throw 

away your precautions of some years ago. 

So, I want everybody to look at the exact figures over these last 

30 and 40 years. I don’t think that they substantiate your statement regarding they are low relating to recessions, and they don’t 

take into account the cuts in taxes in the eighties that led to these 

deficits, or was one reason. Economists say at least a third if not 

more of our present shortfall is because of the recent tax cuts. You 

just disregard that. 

So, we read back your words not because we want you to eat 

crow 3 or 4 years from now, but because we want some sound policies next year as well as this year. So, tell us again, you have just 

a little time, you are really totally confident that your concerns of 

1995 about these deficits are irrelevant to this situation of this 

year 2003 and 2004? They are irrelevant? You have no concern? 

You are jolly well sure everything is going to be fine? 

Mr. SNOW. Oh, you are not going to paint me into that corner. 

Chairman THOMAS. The Chair would indicate that the gentleman’s question consumed the 5 minutes. The Chair allowed the 

19

witness to answer a question which was 41⁄2 minutes. If the pattern 

continues, the Chair would request all Members to submit their 

questions in writing, and the Secretary may answer them in writing. Therefore, the Chair would appreciate the reasonableness of 

not abusing the timeframe in which the entire time is taken up 

with the question. The Chair then feels compelled to allow the witness to answer it. Let the Chair note, this is the second time in 

a row that it has occurred. Early on we seem to be in midseason 

form. Mr. Secretary. 

Mr. SNOW. Thank you. Let me be brief. The circumstances of 

then are different than the circumstances of now. Deficits matter. 

If the markets perceive deficits as being out of control, there will 

be market reactions. These deficits are not out of control. Interest 

rates is the barometer to look at to determine whether markets are 

beginning to get jittery. We have the lowest interest rates, Congressman, as you know, in 40 years, and the level of interest rates 

simply isn’t consistent with the observation that this deficit threatens our financial security. 

On the other hand, we must always be vigilant on deficits. It is 

critical that we be vigilant on deficits, and there are two ways to 

deal with deficits, in my view. One is a lot of growth. Get the stock 

market strong again. Get more people working. Get corporate profits up. Receipts will rise. Second, it is tight spending controls. That 

is the only way to do it. 

I will continue to be a serious deficit hawk. I don’t retreat at all 

from my view that deficits matter, and that deficits that are too 

large relative to the scope of the economy and a corresponding debt 

level that is too high relative to the size of the economy if perceived 

as being a permanent part of the financial landscape are troubling, 

and will invite higher interest rates, which will slow growth. 

So, I remain committed to fiscal discipline, but I also think—and 

I mean this sincerely—that things like the dividend exclusion and 

the small business tax reductions and accelerating these tax cuts 

will give us growth that will help to put us on a path where the 

economy is much stronger. 

Chairman THOMAS. The gentleman from Michigan’s time has 

expired. Does the gentleman from California wish to inquire? 

Mr. HERGER. Yes. Mr. Secretary, I want to join in thanking you 

for appearing before our Committee and congratulate you on your 

recent confirmation. I want to start by commending the Bush Administration on its proposals to make it easier for Americans to 

save for their retirement. 

As you know, many Americans today are concerned that they 

will not be able to save enough for their golden years. This is especially true for the more than half of all Americans who work for 

small businesses. Consider that while 85 percent of employees at 

firms with more than 100 employees have an employer or unionsponsored pension plan, only 31 percent of those working in firms 

with fewer than 100 employees have such a plan. As a result, only 

half of all working Americans have any pension plan at all. Small 

businessowners often cite the complexity of current rules and high 

compliance costs as reasons they do not offer pension plans. 

20

Mr. Secretary, by simplifying and streamlining pension plan 

rules, do you anticipate that it will be easier for smaller employers 

to offer these plans to their employees? 

Mr. SNOW. Congressman, absolutely. The whole purpose of 

these lifetime savings accounts, the so-called LSAs, and the retirement savings accounts, the RSAs, is to do precisely that. Only 

something like 25 percent of small businesses have any retirement 

plan, and the reasons you cite explain that: complexity, lack of 

flexibility, withdrawal terms, age limits, and on and on and on. 

What these new accounts do is to create a much more flexible and 

a much simpler way to save. I think that will clearly lead more 

small companies to put in place savings plans, and that will serve 

an important national objective of encouraging savings and promoting retirement security. I think this is a splendid development, 

a splendid proposal. 

Mr. HERGER. Thank you. Speaking of small business, let me 

also commend the Administration for its proposal to triple the 

small business expensing limit. Under the current law, small businesses can expense or fully deduct from taxable income up to 

$25,000 per year in new business investment. The Administration’s 

proposal would increase this limitation to $75,000 per year, thus 

making it more affordable for businesses to make the kinds of business investments that we know are critical to our Nation’s economic well-being. I have introduced legislation to implement the 

Administration’s small business expensing proposal and look forward to working with you on this important issue. 

Last but not least, I notice that this year’s budget includes a provision to make permanent the research and development tax credit 

that is scheduled to expire next year. This credit is very important 

to high-tech industry. In my home State of California, our State 

ranks first in high-tech employment and second in the high-tech 

average wage. While Californians represent about 13 percent of all 

the Nation’s economy, it represents nearly 20 percent of all research and development spending. This spending creates high-paying jobs and has a positive ripple effect across California’s economy. 

Given the recent economic downturn, it is more important than 

ever that we make the research and development credit permanent. I want to thank the Administration for including this item in 

this year’s budget. 

Mr. SNOW. Thank you very much, Congressman. I think you 

have put your finger on one of the most powerful aspects, the most 

compelling on the President’s proposal. The expensing, I would say, 

though, goes hand in hand, as you know, with the acceleration of 

the reduction in the tax rates because so many small businesses 

operate on a so-called now flow basis. They will be greatly advantaged by having lower marginal tax rates, which will cause their 

businesses to be in effect more profitable, which will lead them to 

want to undertake more investments and to use more of that expanded expensing. The two planks go hand in hand to create job 

growth and expansion in the small business sector. 

Mr. HERGER. Thank you very much. 

Chairman THOMAS. Thank the gentleman. Does the gentleman 

from Maryland wish to inquire? 

21

Mr. CARDIN. Thank you, Mr. Chairman. Mr. Chairman, as I 

pointed out, I welcome Mr. Snow here to our Committee. Mr. Snow 

for a time lived in Baltimore and was not only an outstanding business leader, but a person who really helped our community. Secretary Snow, welcome to the Committee. 

Mr. SNOW. Thank you. 

Mr. CARDIN. We understand that your new assignment will require certain changes as far as your involvement in our community, particularly with Johns Hopkins. We will miss that, but we 

very much welcome you in your new role as Secretary of the Treasury. 

Mr. SNOW. Thank you very much. 

Mr. CARDIN. I want to follow up on the point that was just 

made concerning small business and retirement savings, and I 

have a somewhat different concern. Mr. Portman and I, along with 

other Members of the Committee, Mr. Pomeroy and others, have 

been working in a bipartisan way to try to increase savings opportunities for Americans. With the help of Chairman Thomas, we 

have passed major legislation on a strong bipartisan vote on the 

Floor enhancing opportunity for people to put money away for their 

own retirement. 

We have done that for many reasons. Social Security has been 

mentioned previously, but as you know, private retirement savings 

is critical to the success long term of Social Security, and our savings ratios in this Nation need to be increased. 

At the same time, our priority has been to increase the number 

of employer-sponsored plans, because if the employer puts money 

on the table, it is more likely that younger workers and lower-wage 

workers are going to participate in retirement plans. We also don’t 

want shelters, and this Committee has been pretty clear about trying to avoid types of opportunities that have very little social benefit that are tax-favored. 

So, with that in mind, I want you to respond to two parts of the 

President’s proposal; the first, the President’s lifetime savings accounts. I have a concern that will be a shelter; that it will just 

allow individuals to take moneys that are already in savings and 

transfer them into the LSAs where there is no penalty for withdrawal, can be withdrawn for any purpose whatsoever. Why 

wouldn’t that just be a vehicle? Wouldn’t that be the first advice 

given by any accountant or tax planner, to take the moneys that 

you have in taxable savings and just transfer them over to the LSA 

in order to avoid current taxes? 

Mr. SNOW. Well, there is an annual contribution limit, of course. 

Mr. CARDIN. $7,500. 

Mr. SNOW. $7,000. It is a vehicle—there are always tradeoffs in 

these things. This is a vehicle to encourage savings for smaller 

businesspeople and people who don’t—wealthy people have lots of 

ways to save. 

Mr. CARDIN. I agree with you. 

Mr. SNOW. This is a way to encourage savings on the part of 

people who have a difficult time working their way through the 

complexity of the individual retirement accounts (IRA) and the 

Roths and the 401(k)s and so on and so forth. Now, maybe it can 

be made better, maybe it can be improved, and certainly we would 

22

be interested hearing from you on that and working with you. The 

whole idea is to stimulate savings in the sector of the economy 

where savings rates are inadequate. 

Mr. CARDIN. We share that concern, and that is why we would 

urge you to take a look at some of the proposals that have been 

placed on the table for low-income wage earners to offer incentives 

for them to save, and to encourage small businesses to provide employer-sponsored plans so money is on the table for lower-wage 

workers. 

Your RSA account also troubles me. It seems to me that if I am 

a small businessperson and I have a retirement plan for my employees, and you are now offering me an opportunity to put $7,500 

a year in the RSA account, why wouldn’t I just put the money in 

the RSA account and not go through any of the aggravations of establishing a retirement plan for the rest of my workers? 

Again, our goal is to get more money into retirement savings, 

and it seems to me, with the flexibility that is being offered under 

the President’s proposal, we are liable to end up with less money 

in retirement savings. 

Mr. SNOW. Well, you raise good questions, and some of the questions I have begun to raise myself. When you talk to people who 

market, who are in the business of selling savings accounts of one 

kind or another, they come back and say these are hard to sell because of the complexity——

Mr. CARDIN. So, we should fix those. 

Mr. SNOW. Making available simpler, more flexible savings vehicles of some kind will stimulate savings. That is the objective. 

Congressman, I would be delighted to hear your suggestions on 

how to do it better. 

Mr. CARDIN. Thank you. Thank you, Mr. Chairman. 

Chairman THOMAS. Thank the gentleman. Does the gentleman 

from Louisiana wish to inquire? 

Mr. MCCRERY. Yes. Thank you, Mr. Chairman. Mr. Secretary, 

the Ranking Member of the Committee on Ways and Means today 

made a statement—and I think I am quoting him accurately when 

he—he said that ‘‘most economists think these deficits will be devastating.’’ Although my good friend from New York is not usually 

guilty of hyperbole, he may have slipped up this once. I think it 

is important for us not to let that statement stand. It is important 

because I think the American public wants to know the answer to 

that question; and certainly those of us in the legislative branch 

who are elected by the American public would feel more comfortable voting for the President’s plan if we thought the American 

public agreed with your assessment that these deficits as outlined 

in the President’s plans are not devastating and, in fact, may be 

desirable in the short term. 

In fact, I am fairly sure in saying that the majority of the economists would not agree with Mr. Rangel’s statement, and I will 

quote a couple of them to illustrate why I think that. 

A John Cedar, a professor at North Carolina State University, 

published a comprehensive survey of the literature on this subject 

in 1993 and found that, ‘‘the effects of government debt and deficits 

on the economy are not obvious from either economic theory or statistical evidence.’’ More recently, Kevin Klieson, an economist at 

23

the Federal Reserve Bank of St. Louis, states: ‘‘Empirically, the 

linkage between budget deficits or surpluses and interest rates is 

weak.’’

So, in fact, the literature does not support the conclusion that the 

Ranking Member has drawn, and, in fact, there is probably some 

disagreement among economists as to the effect of deficits the size 

of which are portrayed in the President’s budget. I think that probably is the most important subject we should discuss with respect 

to the question of deficits. The deficits referred to in the early 

eighties, for example, ran about 6 percent of our GDP. Now, I 

would probably agree that those deficits, if allowed to string out 

over a number of years, could become dangerous. The deficits outlined in the President’s budget at their highest are 2.8 percent and 

then quickly going down to 1.8 percent, 1.6 percent and so on. 

Clearly, the deficits anticipated by the President’s budget are nowhere near the deficits we experienced in the eighties, in the early 

eighties. So, I think it is important for the public to understand 

that. 

Also, you have alluded to the fact—or your belief anyway—that 

these deficits will be short-term and, in fact, are necessary or at 

least desirable in order to improve the economy, to get the economic growth at a higher rate. Is that correct? Is that your assessment? 

Mr. SNOW. It absolutely is, Congressman. I agree with your assessment of deficits. Deficits become troublesome when they are 

large relative to the earning power of the economy and seen as 

going on and on. That is when financial markets get upset. 

Mr. MCCRERY. Structural deficits. 

Mr. SNOW. Structural deficits. 

Mr. MCCRERY. Are we in a structural deficit now? 

Mr. SNOW. No, we are not in a structural deficit. The deficit, as 

I have said, is modest relative to historical circumstances and modest relative to the circumstances we find ourselves in. Most importantly, it is going to be declining both in absolute terms and in relative terms. It is a manageable deficit. Do I wish we could accomplish all that we need to accomplish, the war on terrorism, the 

stimulating and growing the economy, preparing for longer term 

growth with well thought out tax advantages? Yes, I do. This is an 

investment in our future. It is a prudent investment in our future. 

Mr. MCCRERY. In fact, Mr. Secretary, if you look at the history 

books, you will see that every time the United States has been at 

war, we have run deficits. Every time the United States has had 

a recession, we have run deficits. This is no different. 

I would like you to comment quickly, if you could, on a statement 

made by another Member of the Minority on the Committee who 

said that the dividend exclusion would have little effect on the cost 

of capital or the stock market. Do you agree with that? 

Mr. SNOW. No. I would disagree with that very strongly. I think 

the dividend exclusion will be a very powerful—have a very powerful effect on equity investments, on equity valuations longer term, 

and on growing the economy. It will lead to a stronger and better 

economy. It is a centerpiece of this proposal. 

Mr. MCCRERY. Thank you. 

24

Chairman THOMAS. The gentleman’s time has expired. Does the 

gentleman from Washington wish to inquire? 

Mr. MCDERMOTT. Sure. Mr. Secretary, you have had a very 

calming influence on this Committee; they are very quiet. Now that 

Mr. McCrery has ruled out any more hyperbole, I just want to give 

one quote from your past. 

Within 10 years from 1995, the Federal budget’s two fastest 

growing components, interest on the debt and entitlement such as 

Social Security, Medicare, Medicaid, and Federal pensions, will 

consume all the Federal revenue. There will be no money left for 

any other Federal programs, not even national defense. Now, you 

wouldn’t stand by that, would you? 

Mr. SNOW. The underlying forces that were at work then——

Mr. MCDERMOTT. You mean when Democrats were raising 

taxes——

Mr. SNOW. Are fortunately——

Mr. MCDERMOTT. Paying this on the debt? 

Mr. SNOW. Are fortunately, still at work longer term. My crystal 

ball was off by some time. Those demographics that are driving 

those numbers are—and that, as you know better than I, health 

care costs, those forces are still at work. 

Mr. MCDERMOTT. Well, I have a very hard time sitting here listening to what was said by the last speaker, and you agreed with 

it. Mr. McCrery said when we have wars, we run deficits; when we 

have depressions and recessions, we have deficits. I don’t remember 

that we cut taxes every time that we had a recession or a war. 

That is what is different about this. What really troubles me—and 

I was riding out on a plane from Seattle, and a guy said to me, 

I do not fly U.S. carriers anyplace but in the United States. I won’t 

go overseas on one of them because I am afraid. 

What I am trying to figure out is how does the President stimulate people to invest when people are scared about a war? If you 

can explain to me how cutting the dividend tax will somehow in 

this climate stimulate—I saw this ad in the Wall Street Journal 

where they had this—all these business people saying, we don’t 

want to go to war. The war must be a stimulus for something, and 

I—why is the President taking us to war and giving away the 

money at the same time? How is that going to work? Explain that 

to me, because I am not an economist. 

Mr. SNOW. The juxtaposition there, of course, is we face an external threat, and we need to address the external threat. We also 

face an internal threat, the need to keep the economy strong and 

on a good growth path. We are responding to both simultaneously, 

and that is appropriate. 

Mr. MCDERMOTT. How can starting a war that is going to 

spend $100 to $200 billion over the next 10 years—and that is 

what Mr. Lindsey said before they fired him, so I assume he was 

telling us the truth right up there until the end. The fact is that 

if you are going to take that out of the economy, how are you going 

to have a stimulus of anything in a peacetime economy? 

Mr. SNOW. Congressman, the President is trying to avoid a war, 

not get into a war. He is trying to——

Mr. MCDERMOTT. Did you advise him not to go to war? 

25

Mr. SNOW. I am not at that end of the government. The President has plenty of good advisors on national security and on those 

issues. 

What I would advise the President is that he has got a good 

growth package, and that this is the time to have a growth package. This is the time to make sure the economy stays strong. It is 

a growth package that is based on sound economics. If there are 

any economists who say that the dividend—that paying twice on 

corporate income, both at the corporate level and the individual 

level, is good economics, I haven’t met them. I sure have met a lot 

who think it isn’t good economics. I sure have met a lot who think 

it will stimulate the economy to lower the cost of equity capital. I 

have met an awful lot who think that we are encouraging debt-toequity ratios that are too high. I have met many Congressmen who 

feel, as I do, that the current system discourages corporations from 

paying out their earnings in the form of dividends, because, after 

all, the effective rate on dividends is something like 70 percent. I 

don’t——

Mr. MCDERMOTT. So, what you are saying is that having given 

this dividend break to the people on the top of the economic ladder, 

that will suddenly make it all better for the people in my district 

where the long-term unemployment has risen by 26 percent in the 

last 6 months. How is that going to work for the people on the bottom? 

Mr. SNOW. Congressman, let me respond. There are a lot of people who will benefit from that dividend provision. Half of the American families are stockholders now. My mother was a schoolteacher. 

She taught in the Ohio public school system and retired on a pension from the Ohio school system. She also inherited from my father a few stocks, and she owned a few stocks; not a lot, never 

wealthy at all. She and her fellow schoolteachers would get together and have a cup of coffee or something once in a while and 

talk about their circumstances. Often their conversation turned to 

how low the Ohio State pension payments were to them, but how 

needful they were of it. Often the conversation turned to other 

sources of income, one of which was dividends. 

To my mother, who lived on—I think her pension was $8,000 a 

year from the Ohio State teachers’ plan, getting $200 or $300 extra 

from her dividends would have meant an awful lot. I submit there 

are a lot of people like that, elderly people for whom a few hundred 

dollars extra a month from a dividend would mean a lot. 

Chairman THOMAS. If anyone is concerned about non-monetary 

incentives, I think there are a lot of folks in Ohio nowadays talking 

about ‘‘how about them Buckeyes.’’ Does the gentleman from Wisconsin wish to inquire? 

Mr. KLEZCKA. Mr. Chairman, thank you for the time. Mr. Secretary, there has been a lot of talk about deficits this afternoon, 

and I think I have sat here long enough. I have got it figured out. 

When deficits are increased during a Democratic Administration 

like in 1995, that is bad. When deficits are increased during a Republican Administration, that is okay; that is better. Mr. McCrery 

even told us that it is not only okay, but it is desirable. So, I just 

think I have it figured out. I want to share with my colleagues so 

26

maybe we can get off the deficit thing and know for a while that 

we are going to be in a period of deficits whether we like it or not. 

Years ago we were told that the effect of deficit was to raise the 

capital costs for other players in the market because the government is there taking it first. I guess those rules have changed also. 

Mr. Secretary, my question to you is can you share with the 

Committee what the stimulus effect or the growth effect has been 

since the 2001, $1.2 trillion tax cut? 

Mr. SNOW. Yes. I think you and your colleagues in the Congress 

and the Administration should take great satisfaction out of the 

fact that we avoided a much deeper, a much harsher and much 

longer recession. 

Mr. KLEZCKA. Okay. So, it hasn’t had any effect on unemployment. We have seen that balloon over the last year. Okay. Can 

you——

Mr. SNOW. I am sorry. You need to compare things with what 

they would otherwise have been, and without the effects of the Economic Growth and Tax Relief Reconciliation Act of 2001. I will submit to you that the economy would be in much worse shape today 

than it is. 

Mr. KLEZCKA. Okay. Do you admit that it is not in very good 

shape today? 

Mr. SNOW. I think it is recovering. The recovery isn’t as certain 

or strong as I would like to see. 

Mr. KLEZCKA. Well, it hasn’t recovered in Milwaukee, Wisconsin. In fact, as I looked at the monitor earlier in the day, the 

stock market, the Dow, was down another 130. So, I can’t concur 

with you the economy is resilient. I think we are still in some very 

deep and serious problems. Can you indicate to this Committee and 

to the American public that although the $1.2 trillion tax cut didn’t 

bring us out of the recession totally, that if we throw another $674 

billion at her, she is going to do it this time for sure? 

Mr. SNOW. I would be confident that the course that the economy is on with the benefits of this package would, to a very high 

degree of probability, give us considerably more growth and considerably more jobs. I think the estimates are 450 to 500,000 additional jobs by the end of this year, and something like a million 

and a half, a million four, by the end of the fourth quarter next 

year. That would make a real dent in unemployment. 

Mr. KLEZCKA. Again, that is a speculation. That is a guesstimate. 

Let me ask one final question, Mr. Secretary. In the event that 

the President would go forward and attack the sovereign nation of 

Iraq, incurring what some experts indicate could be as much as an 

$8 billion cost per month—and that is on the low end, at that point 

would you recommend to the Congress that because of that incident, because of that occurrence, and because of the attendant 

costs of the war, that we should put aside for at least a small time 

or short time the tax cut? 

Mr. SNOW. Congressman, I am still hopeful that war will be——

Mr. KLEZCKA. No, no. Let us get past that, okay? You and I 

aren’t in that decision process. Let us say it would occur, and if you 

ask me, it will occur, because I think the President is possessed 

with this. That is not the debate before this Committee. Let us say 

27

it would occur, and we are incurring costs to the tune of a minimum of $8 billion a month for the war. Would you at that point 

come to the Congress and advise that we set aside, for at least the 

time being, the tax cut that is on the table now? 

Mr. SNOW. Congressman, I think that is awfully speculative. 

What I do know is the tax cut that is on the table in the circumstances we are in now makes good sense. I can——

Mr. KLEZCKA. If the circumstances change, and a higher priority then is the expenditure to keep our troops safe and to keep 

them armed. At that point would you say set the tax cut aside so 

he can fund the war totally? 

Mr. SNOW. Congressman, I will say what I said earlier: That 

governmental policy should be addressed to priorities of the country. 

Chairman THOMAS. The gentleman’s time has expired. Does the 

gentleman from Michigan wish to inquire? 

Mr. CAMP. Thank you, Mr. Chairman. Mr. Secretary, thank you 

for being here. I want to commend the President on his budget for 

the permanent extension of the research and development tax credit. I think that is a positive thing that will help investment, help 

product innovation, and ultimately create jobs. There is legislation 

that has been introduced by my colleague Mrs. Johnson, which I 

have cosponsored as well as Congressman Matsui and Cardin, that 

will help allow more companies to utilize that credit. I look forward 

to working with you on that. 

We have had a particular problem with cyclical companies, those 

in the manufacturing sector, that, after September 11 and the economic slowdown that followed, have not been profitable. I think one 

way—and also, these companies are facing alternative minimum 

tax (AMT) and pension liabilities. I think one way to provide needed cash flow to these employers would be the extension of the net 

operating loss carried back from 2 to 5 years for losses incurred in 

2003 and 2004. Do you think there is any likelihood that that provision might occur? 

Mr. SNOW. I will have to check with the people who know a lot 

more about the technical side of those things than I do at this point 

and get back to you, but I will be pleased to do that. 

[The information follows:]

Response: Under current tax law (as well as law in effect prior to 2002), the net 

operating loss (NOL) of a taxpayer generally can be carried back 2 years and carried 

forward 20 years to offset taxable income in such years. The carryback and carryover rule were established to allow taxpayers to level out fluctuations in taxable income. In 2002, temporary economic stimulus provisions applying to NOLs originating in 2001 and 2002 generally allowed a longer 5 year carryback period to increase cash flow through the refund of income taxes paid in prior years. The President’s Jobs and Growth Plan did not include an extension of those rules principally 

because of the potential interaction with the proposal to eliminate the double tax 

on corporate profits. Now that Congress has enacted the jobs and growth package, 

we would be pleased to work with Congress on legislation to provide a longer 

carryback period for losses occurring in 2003 and 2004.

Mr. CAMP. Thank you, Mr. Chairman. 

Chairman THOMAS. The gentleman from Georgia wish to inf quire, Mr. Lewis? 

28

Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman. Mr. Secretary, thank you very much for being here. I just 

have a few random thoughts and ideas, you can respond or maybe 

try to give me an answer to. 

How do you justify such a massive tax cut? How much longer are 

we going to blame many of our economic problems on September 

11? Mr. Secretary, we can only wrap ourselves in the flag so long. 

In this budget we see a dramatic increase in defense spending; at 

the same time, we see reduction in resources for domestic program 

across the government. I want to know whether you and the President are prepared to take care of the basic human needs of the 

American people, the people here at home. Mr. Secretary, with this 

budget, what is your vision? What is the vision of the President for 

the American people, for world community as we look ahead for the 

next 5, 10, or 20 years? You may respond, sir. 

Mr. SNOW. Thank you. It is really an astonishing thing, Congressman, to realize what the American economy has been through, 

what our Nation has been through in a relatively brief period of 

time. I remember in my old life in the summer of 2000, a transportation company that operates through your city, as you know, but 

also operates all across this country and all across the world. Something happened in the summer of 2000 that led to a dramatic reduction in carloads, in truckloads, in containerloads not only at 

CSX, but at virtually every other major transportation company. 

That was reflecting something going on in the economy. 

The wonderful period of the 1990s had come to an end. We saw 

it first—some of you mentioned your background in manufacturing. 

We saw it first in manufacturing, and as a transportation company 

we served manufacturing first and foremost. We also served the 

consumer sector of the economy, and the consumer sector began to 

decline slowly, and retail. Then, of course, we knew that by early 

in 2001 there was a recession under way. We in the industrial sector saw it first, but it hit the whole economy in 2001. Then we had 

September 11. Then we had this series of scandals in corporate 

America that shook our confidence in our capital markets, a real 

blow to the capital markets. On top of all that and occurring simultaneously was the biggest meltdown in the history of the U.S. equity markets, with some $7 trillion coming out of the system. 

The wealth effects were massive, and they were widespread, because 50 percent of the families in America own equities. To think 

that we could weather those shocks and still have an economy performing as well as this one is today with low inflation rates and 

low interest rates, with a buoyant consumer market and a buoyant 

housing market, and with productivity in the last quarter an alltime high, it is really an astonishing commentary on the resiliency 

of this economy. Resiliency, that grows out of things that were done 

in the seventies and with deregulation and downsizing, and in the 

eighties with rightsizing and reengineering corporate structures 

and the application of technology to modern business, all of 

which—and the growth of global trade, all of which made this economy much more resilient than it otherwise would have been. You 

have all heard Chairman Greenspan talk much more eloquently 

than I can on those themes. 

29

So, what do we want? We want an America that provides people 

with good jobs and good futures, real jobs, permanent jobs, and a 

sense of security. As Secretary of the Treasury, I have a real responsibility, Congressman, to play a leadership role in getting the 

American economy righted, to getting it going in the right direction, to giving people the opportunity to get the work they want, 

but with real jobs and rising standards of living, rising real wage 

rates. That is the sort of world that I believe in, and it is the sort 

of world the President believes in. 

Mr. LEWIS OF GEORGIA. Thank you. 

Chairman THOMAS. Thank the gentleman. Does the gentleman 

from Louisiana, Mr. Jefferson, wish to inquire? 

Mr. JEFFERSON. Yes. Thank you, Mr. Chairman. I want to ask 

the Secretary this question. I have heard the idea of a stimulus 

package described as having two essential features, perhaps only 

two: The first being that it would be temporary, and the second is 

that it would have the effect of stimulating consumption either on 

the part of individuals or companies. Do you deal in a different definition of a stimulus package than that, or do you agree that that 

is the proper way to define it? 

Mr. SNOW. Actually, I am not sure that I got—if I don’t respond, 

it is because I may have missed a word or two there. I think your 

question went to the relationship between the permanency. 

Mr. JEFFERSON. It went to the definition of what a stimulus 

package really is, the essentials of it. The essentials that have been 

talked about most in this Committee from every expert I have 

heard come before us is that the stimulus package is always temporary, and it always stimulates consumption either by individuals 

or by corporations. 

Mr. Chairman, I have had to say that twice. I hope it doesn’t 

take away from my time. 

Mr. SNOW. Okay. I don’t look at this as a traditional stimulus 

package. I look at this as a set of good economics which will have 

short-term and long-term effects. In the short term, there will be 

this spurt to growth that will assure that we stay on the recovery 

path and create the 500,000 jobs by the end of the fourth quarter 

of this year, and the million plus by the end of the fourth quarter 

next year, raising GDP by a percentage point or so, 1.1 I think in 

the numbers. Also, also—and this is I think the critical thing about 

this plan—creating, putting us on a stronger path for long-term 

growth that so forever, not just next year or the year after, but forever we are going to have the American economy performing better. So it is—I don’t look at it as in terms of it being a short-term 

stimulus package. 

Mr. JEFFERSON. The reason you usually look at it as a shortterm package, because it imposes such huge shock into the economy, usually a huge shock into the budget deficit and to the deficits of the country. Usually sometimes we tolerate reductions in expenditures that the government can make and reductions in government income to offset against the effect of spur and consumption, and—but no one wants to tolerate long-term budget imbalances as a result of a stimulus, and that is why the talk is always 

temporary. 

30

You seem to be saying that it is not a stimulus package in the 

traditional sense, it is some kind of a hybrid of a short-term/longterm package here. Now, that puts a huge bet on the rightness of 

this package, because if it is wrong, then we end up with living 

with deficits for the longest period of time. You need to understand, 

one thing that seems to me has been left out of here, we talk about 

the history that took place that brought these huge surpluses. You 

said was the economy that was rolling along and all that. Also, you 

might recall there were huge sacrifices made by many Members on 

this side of the aisle that dealt with increasing taxes, that set our 

budget right in 1993 that resulted in a whole lot of folks losing 

elections in 1994. That was a myriad of things that happened, not 

just—and many of these things, when we stop competing with the 

private sector and start being able to get interest rates down and 

that sort of business, that helped to spur the economic growth. It 

wasn’t just the fact that somehow it just took off; it was that we 

did some things here that actually set a fiscal stage for that to happen. It didn’t involve tax cuts, it involved tax increases on high-income folks, some direct targeted benefits to small businesses, and 

a number of other features that made the fiscal thing work here 

that really accounted for the positioning for the growth. 

Now, the last thing I should say before my time does run out, 

I don’t think there is any real room for what I might call informed 

disagreement on the issues that were raised by Stephanie Tubbs 

Jones a minute ago and by some others here about the effect that 

this corporate dividend deduction business shareholders will have 

on the tax advantage investments in low-income housing and new 

market tax credits and others. I don’t think there is any basis to 

think that these effects won’t follow. There is no need to have a follow-up question or a memo sent because it is pretty obvious, unless 

the shareholder doesn’t get the tax-free dividends, unless the corporation pays the taxes. Ordinarily now we are depending on corporations to pay to take advantage of these credits in order to reduce that taxable income, and these things work against each 

other. 

So, there has to be—my question is, since I know that is the effect of it, has the Administration thought about how it might minimize that or mitigate against it by having some sort of an opportunity for individuals perhaps to take advantage of the low-income 

housing rather than corporations to incentivize moving in that direction—so that you cannot have such a huge set of problems created by this business in the new market size credit and low-income 

housing area? 

Mr. SNOW. Congressman, I will look forward to getting back to 

you on that. I responded earlier by saying that what I have looked 

at suggests the impact is not great, municipal bonds and other 

forms of investments, primarily because while there could theoretically be a relationship because they are substitutes in some ways, 

equities and debt, other forms of debt investments, the debt investments have a structure of their own that fits a particular investor 

profile, low risk, sort of fixed return, and they appear to be basically debt in equities. The sort of debt you are talking about, municipal bonds and so on, State bonds, are separate markets without 

close substitutability. 

31

That is a subject that you raised a good question, and I will 

agree to look into it in more detail. 

[The information follows:]

Response: As finally enacted by Congress, the provision reducing the double tax 

on corporate profits will have absolutely no effect on the low-income housing tax 

credit.

Does the gentleman from California, Mr. Becerra, wish to inquire? 

Chairman THOMAS. I thank the gentleman for his comments. 

f Mr. BECERRA. Thank you, Mr. Chairman. First, Mr. Secretary, 

welcome, and congratulations on being named the new Secretary. 

We wish you well and look forward to working with you. 

Mr. SNOW. Thank you very much. 

Mr. BECERRA. Obviously there will be a lot of issues that will 

bring you to our Committee often, and we are looking forward to 

have the chance to dialog with you. 

I want to move back to what the President said in his State of 

the Union Address where he mentioned that he will not pass along 

our problems to other generations. That made me reflect back to 

what he had said just 2 years before in 2001, shortly after his State 

of the Union in his first year in office, where he said that every 

dollar of Social Security and Medicare tax revenue will be reserved 

for Social Security and Medicare. He said this, if you recall, to allay 

fears that many of us had that his 10-year, $1.7 trillion tax cut 

that would benefit mostly wealthy Americans would take us back 

down the road of deficits and raids on the Social Security and 

Medicare Trust Funds. 

Today, the President’s budget that we are discussing today would 

consume all of the Social Security and Medicare Trust Fund surpluses for at least 5 years, and likely longer, and that totals more 

than $1 trillion that would be raided from the Social Security and 

Medicare Trust Funds. 

On top of that, rather than reduce or eliminate the debt, the national debt, as the President had first said he could back in 2001, 

his budget increases the national debt dramatically by well over $1 

trillion over the next 5 to 10 years, depending on what happens 

with the economy. 

Now, about a year ago, the last numbers we have special data 

for, we paid as a Nation about $171 billion in interest payments 

on the national debt. So, $171 billion in taxpayer money went for 

nothing more than to pay interest, gave us nothing, nothing more 

for our schools, nothing more for health care, did nothing for our 

roads, just to pay off the interest the way people have to pay interest on their mortgage or on a student loan. According to the Office 

of Management and Budget Director, Mr. Mitch Daniels, apparently we are looking at the possibility of having budget deficits increase to about $300 billion a year. 

If when we had a national debt that causes us to pay $171 billion 

in interest, which amounts to about $1,300 per every American 

family in this country, if you look at a $300 billion deficit, which 

Mr. Daniels says we can expect, that is probably some $2,300 out 

of the pocket of each and every American family that, for most, 

32

would be difficult to shoulder, let alone try to find moneys to save 

under the President’s new tax savings plans. 

My question is the President’s proposal to cut taxes which he has before us which would cost us another $900 billion or so, which 

principally deals with dividend—elimination of the dividend tax, 

which benefits again mostly wealthy folks because they are the 

ones that own most of the stock. How is that going to help the average American? I know the President—and Mr. Secretary, I think 

you mentioned as well—that the average tax cut under this plan 

will be about $1,000 or $1,100, but I know that that factors in the 

very biggest tax cut with the very littlest tax cut, and the average 

comes out to $1,000. For the typical taxpayer, the person right in 

the center, the middle-income person, that 20 percent of Americans 

who are smack in the middle, my understanding of the Tax Code 

would be a little bit more than $200 for the entire year, because 

they are a little bit more typical than the average family of four 

with two kids. You know, whether we like it or not, the average 

family doesn’t look like that anymore, and the typical middle-class 

family would receive about a $200 to $250 tax cut, whereas the 

millionaire would probably get, under this plan, about $90,000 in 

a tax cut. 

In an age where we are seeing our deficits grow, where the na- tional debt has increased, where we are paying over $170 billion 

a year in interest payments to do nothing to help education and 

health care, can you tell me where we are going to get the money 

to try to decrease the debt and still provide these tax cuts that benefit mostly wealthy Americans? 

Mr. SNOW. Sure. You have asked me a lot of questions. I don’t 

know that I can respond to all of them. 

Chairman THOMAS. I will tell the gentleman he has 30 seconds 

in which to respond. I am very mindful of the clock in trying to 

move the Committee along. 

Mr. SNOW. Well, first on Social Security, which is where you 

started, the—ultimately, the government’s ability to pay for Social 

Security depends upon the capital stock of the country and on the 

output of the economy, not the size of the trust funds. You know, 

it is a pay-as-you-go system. The numbers I cited were a family of 

four, $40,000 and $1,000. The numbers you cited were for some different distribution that I can’t recall right now, but I will just answer the question. 

Mr. BECERRA. The one-fifth percent. 

Chairman THOMAS. The gentleman’s time has expired. We do 

have a transcript, and can supply the questions. We appreciate the 

Secretary answering the gentleman’s questions. Does the gentleman from Ohio wish to inquire? 

Mr. PORTMAN. Thank you, Mr. Chairman. Mr. Secretary, you 

have done quite well on your maiden voyage, as you called it. You 

have navigated the questions well, and you have given this Committee a lot of good input for us to be able to legislate responsibly, 

which is the purpose of these hearings. 

Just quickly in response to my friend from California on the interest on the debt, of course none of us want to see us go back into 

deficits. When I got elected, we were paying about 20 percent of 

our annual budget on interest on the debt. It is going to be about 

33

8 percent next year based on projections, because we were taking 

advantage of lower interest rates, interest rates being the lowest 

they have been in 40 years. We have to remember that about our 

economy, and that goes to the issue of our deficit and its impact 

on the economy, obviously, because our interest payments are lower 

because rates are lower. 

As a percentage of GDP, I heard earlier people saying that this 

is going to be the worst ever and compare it to past years. As I look 

at it, looking at the data over the last 20 years, it will be a smaller 

percentage of GDP next year, even with all of our problems, than 

it has been in 12 of the last 20 years. In fact, back in the early 

eighties when the other party controlled this place, it was about 

twice of the percentage of GDP that it will be next year even with 

quadruple whammy that the Secretary talked about, war, recession, and emergency, and of course the impact of corporate accountability. September 11 alone—someone said earlier—$100 billion in 

direct costs to American taxpayers. The intangible impact no one 

can calculate to our economy and to the global economy. 

Just quickly, Mr. Secretary, you talked about the importance of 

us getting back to fiscal discipline. I couldn’t agree more. The way 

we did it in the nineties was we restrained spending, we kept it 

under control. I know people are anguished. They have talked earlier today about we aren’t spending enough in this budget. Well, 

how much is enough? We are going to spend over 4 percent in this 

budget. I think the President is smart to keep it at that level. We 

should perhaps be doing even more in terms of keeping our spending under control, but that is, of course, about half of what we have 

been doing in Congress over the last several years. 

So, the key is restraining spending. That is what happened in 

the nineties. That is how we got the balanced budget. That is how 

we got our growth back. The second part, of course, is using that 

to grow the economy. If you could just briefly again, Mr. Secretary, 

tell us how the tax package as a whole, including the dividend tax 

cut, stopping the double taxation of dividends, will help grow this 

economy. 

Mr. SNOW. This tax package will help grow the economy because it will create more disposable income in the hands of consumers and not—and will reflect today a greater sense of confidence in the economy that they will have as they know that 

money will be coming in the years ahead. So, they will telescope 

into the present the ability to use tax cuts in the future that would 

have only been available in the future. That will lead to more 

spending. As spending goes up, it will lead to growth in businesses; 

it will lead to more investing. As small business will take advantage of the expensing provision, lower costs of equity capital will 

encourage people to issue more equity capital, and we will get better patterns of spending and investing in savings, will make the 

economy more efficient. As you make the economy more efficient, 

it grows, and that is good for everybody. 

Mr. PORTMAN. Mr. Secretary, even those who would agree with 

you on that might still say, as Mr. Rangel did at the outset, gee, 

this is not fair, because you are shifting the burden to those who 

are working people as opposed to those who are investing people. 

34

He said that this burden would shift. Payroll taxes would be used 

for the tax cuts. 

As I add it up, about 34 percent of our revenue this year will 

come from payroll taxes, from Social Security and Medicare. Social 

Security alone will be about 22 percent of our budget, another 23 

percent in health care, including Medicare and Medicaid. That is 

about 45 percent. 

Would you say that payroll taxes are not being used for their intended purpose? 

Mr. SNOW. Payroll taxes are essentially premiums on Medicare 

and Social Security. 

Mr. PORTMAN. I would just say finally, Mr. Secretary—I don’t 

have a whole lot of time here, unfortunately—but if you look at 

your overall package, including ending the double taxation of dividends, the average tax reduction ranges from about 17 percent for 

taxpayers with under $30,000 in income to just over 11 percent 

with taxpayers who are in the over $100,000 range. Because the 

percentage reduction is greatest for families with incomes under 

$50,000, those families will pay a smaller share of the total income 

tax burden at the end of the President’s proposal, and that is something we need to keep in mind. 

Conversely, those families with over $100,000 in income will receive a smaller than average percentage reduction, of course, and 

they are going to pay a larger share. Already, the top 1 percent 

pays about 37 percent of our income taxes, and maybe that is not 

enough. They are going to be paying a higher percentage after this 

is all done. The top 10 percent now pays 67 percent of our income 

taxes. Maybe that is not enough, but they are going to be paying 

a higher percentage. 

So, just to get back to Mr. Rangel’s point, I think we need to look 

at the facts. 

Finally, Mr. Secretary, on your retirement savings proposals, I do 

hope you will look at what we have done. In the last 5 years, this 

Committee has been very aggressive in increasing the amount people can contribute to their retirement, simplifying the rules and allowing for portability. We would like to continue doing that. 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Texas, Mr. Doggett, wish to inquire? 

Mr. DOGGETT. Thank you, Mr. Chairman. Mr. Secretary, I 

want to applaud your role as Co-Chair of the Conference Board 

Commission on Public Trust and Private Enterprise and specifically the recommendation that you made last month that auditors 

should not be in an advocacy position on items such as novel and 

debatable tax strategies and products that involve income tax shelters and extensive offshore partnerships or affiliates. 

As you may know, I have been seeking for the last 4 years to get 

changes in the law to shut down abusive corporate tax shelters. 

Last year, Chairman Thomas adopted some of this language in 

some legislation he introduced to incorporate and codify the judicially known doctrine of economic substance. Tomorrow, Chairman 

Grassley and Ranking Member Bachus are marking up economic 

substance legislation that, as best I can tell, tracks pretty much 

near verbatim what I have been advocating. 

35

My question to you is whether we can count on your leadership 

in cracking down on abusive corporate tax shelters and specifically 

in supporting the approach that the Senate Committee on Finance 

appears ready to undertake to codify the economic substance doctrine. 

Mr. SNOW. Congressman, I support the economic substance doctrine. I think it makes good sense as a judicial concept. Whether 

it should be codified or not, I have not at this early stage of my 

tenure been able to give a lot of thought to. I would have some reservations, because when things get codified you lose some of the 

flexibility that courts or administrative agencies might have in applying these principles. 

On the question of whether I will be vigorous and attentive to 

the issue of abusive tax shelters, absolutely, I will. 

Mr. DOGGETT. Then let me ask you about something that you 

had reservations about. In fact, only about 11 months ago you indicated that you hoped the Republican stimulus package would not 

be approved by the Congress. Was there any public expression of 

your support for any stimulus package prior to your announcement 

that you would be serving as Treasury Secretary? I am talking 

about the interview you had down in Boca Raton with Bloomberg 

last February 28. 

Mr. SNOW. I don’t actually recall that, but I certainly have 

shown disinclination to support various stimulus packages in the 

past. I didn’t support the stimulus package that was proposed 

shortly—or discussed, anyway—shortly after President Clinton 

took office. 

Mr. DOGGETT. I certainly agree with you about your comments 

last year in Boca. So, this is the first stimulus package you have 

endorsed, the one you are here on today? 

Mr. SNOW. Congressman, you have to refresh my recollection, 

because I don’t really recall that interview. 

Mr. DOGGETT. Well, the deficit that will result from the plan 

that you are embracing today is truly historic. In absolute dollar 

terms, this is about the largest annual deficit that we have ever 

had in the history of the United States, isn’t it? 

Mr. SNOW. As Congressman Portman pointed out, it is small 

relative to the size of the economy compared with a number of 

prior deficits. We have to keep in mind that this is a huge economy. 

Mr. DOGGETT. In terms of absolute dollars, though, it is historic, and in terms of relative percentages, it is much higher than 

when you were concerned opposing deficits back in 1995. 

Mr. SNOW. I started that process, though, Congressman, back—

somebody said that I never was concerned about deficits when Republicans were in office. I remember working with President 

George Herbert Walker Bush on a balanced budget amendment. 

We were concerned about budgets back when he was President. 

Mr. DOGGETT. Seeing our deadline approaching, you know that 

Mitch Daniels has said that these deficits and the debt associated 

with them are going to continue for the next 10 years; and my 

question to you is, isn’t it obvious that with the baby-boomers beginning to make greater use of Medicare and Social Security, more 

of them, that if you keep piling on deficits and public debt for the 

next 10 years at truly historic levels that our ability to assure the 

36

soundness of Social Security and Medicare is going to be compromised and that, further, it is equally obvious that the debt tax, 

the tax that we all have to pay to finance the public debt, is going 

to continue to go up? 

Mr. SNOW. Congressman, I didn’t see what OMB Director Daniels said. I don’t see deficits way out into the future that way. I 

think this economy is going to grow at rates that are higher than 

we are showing in the numbers that you may have seen. It is not 

incorporated into the plan, the budget plan, the growth aspects of 

the President’s proposal. It has incorporated into it the costs of the 

proposals. You know, if we can get a couple tenths of a point of revenue growth and get a couple tenths of a point reduction in expenditures and get a couple tenths increase in GDP, these numbers all 

of a sudden change dramatically, and that is what we ought to be 

working on. 

Chairman THOMAS. The gentleman’s time has expired. Does the 

gentleman from North Dakota wish to inquire? 

Mr. POMEROY. Thank you, Mr. Chairman. Mr. Secretary, you 

have already proven yourself to be an articulate representative of 

the Administration’s fiscal policies as Secretary of the Treasury. 

Congratulations on your performance today. 

Mr. SNOW. Thank you very much. 

Mr. POMEROY. You have referred earlier in your testimony this 

afternoon to Social Security as essentially a pay-as-you-go system. 

Presently, however, there is a surplus. Payroll taxes bring in more 

for Social Security than are spent on Social Security, is that correct? 

Mr. SNOW. That is correct. 

Mr. POMEROY. The balance, that cash that now comes in for Social Security, under the deficits contained in this budget, that cash 

will be spent on funding those government programs? 

Mr. SNOW. The balances will be credited; the surplus will be 

credited. 

Mr. POMEROY. I know there is going to be some IOUs. Mr. Secretary, I understand the IOU accounting business. The cash will be 

spent not on paying off the national debt, not held somewhere for 

future Social Security obligations. The cash will be spent to fund 

these other government programs, is that correct? 

Mr. SNOW. It is part of the general revenues. There is an IOU, 

as you know, to the Treasury. 

Mr. POMEROY. Right, it will be funneled into general revenues 

and will be spent. 

Mr. SNOW. That will be honored with the full faith and credit 

of the United States. 

Mr. POMEROY. Right. I understand that. Cash will be spent, 

and we will get an IOU. 

Yesterday, I was visiting with a university president from North 

Dakota. He indicates under the very difficult fiscal constraints facing our State, like so many States, tuition increases are about inevitable. He looks at 16 percent next year, maybe 14 percent the year 

after, if they don’t do better in the legislature than is presently anticipated. That is about a 30 percent bump in tuition over 2 years. 

Students are already facing in my State, as they are across the 

37

country, record historic levels of tuition obligations. Student loan 

debts are the highest ever. 

Now, we were able to pass—the budget plan passed last year included a deductible feature for interest paid on student loans. Does 

your budget continue this student loan deductibility? 

Mr. SNOW. Congressman, I can’t say that I know the answer to 

that. 

Mr. POMEROY. You have some resources with you, Mr. Secretary. I will await your answer. 

Mr. SNOW. I am sure Mitch Daniels would, and he will be here. 

Mr. POMEROY. I will await your answer right now, Mr. Secretary. I bet one of these people will be able to tell you whether 

or not the student loan deductibility continues or not. 

Mr. SNOW. Well, if they can, they are welcome to. 

Mr. POMEROY. Mr. Secretary, it is my belief that it expires 

2006 and it is not continued under your plan. In other words, the 

deductibility now allowed for student loan interest goes away, and 

it is not continued under the budget. Someone can correct me if 

they want. I think it is very important that we understand as tuitions go up the deductibility of interest paid by graduates struggling with those student loan obligations goes away and it will no 

longer be deductible. 

Mr. SNOW. I will tell you what I will do, I will get you the answer and submit it for the record, because I don’t know it off the 

top of my head. 

[The information follows:]

Response: Under current law, the above-the-line deduction for higher education 

expenses established by the Economic Growth and Tax Relief Reconciliation Act of 

2001 sunsets after 2005. 

We share your concern for education. As you know, current law provides a variety 

of tax incentives to make attaining a higher education more affordable to students 

and their families. In addition to the above-the-line deduction, current law provides 

the Hope Scholarship Credit, the Lifetime Learning Credit, tax-free withdrawals 

from Coverdell Education Savings Accounts and from qualified tuition programs, 

tax-free redemptions of U.S. Savings Bonds used to pay higher education expenses, 

and a deduction for interest paid on certain student loans, among other incentives. 

The fiscal year 2004 budget proposals do not specifically include an extension of the 

above-the-line deduction for higher education expenses, which will not expire until 

after 2005. As we continue to work on implementation of existing provisions, we will 

continue to examine tax provisions relevant to higher education and to consider education provisions in the budgets for future years.

swer that. I don’t expect you in day number one——

Mr. POMEROY. Okay. I am surprised your resources cannot anf Chairman THOMAS. I will tell the gentleman I believe it is a 

safe statement to say for the remainder of President Bush’s term 

it will be deductible. 

Mr. DOGGETT. That is 2 more years. 

Mr. POMEROY. My belief is it goes away in 2006, and that is 

not contested by the Administration. You know, the retirement savings program is something I have been looking at with great interest. I care a lot about it. Obviously, those that have the hardest 

time saving are those making the most modest amounts of income. 

Last Congress we addressed something that I think needed to be 

addressed. We enhanced the savings incentive for those earning 

38

modest incomes. We allowed them to save more in this tax-deductible IRA. 

Now, as I understand the proposal, you are not going to allow 

IRAs to be tax deductible after this year, is that correct? 

Mr. SNOW. The IRA, as I understand it, will continue but won’t 

be able to be added to after this year. 

Mr. POMEROY. Right. So, you can’t make next year, for example, a contribution to the IRA and deduct it from the amount you 

would otherwise pay tax on. 

Mr. SNOW. That is right. If you have an IRA, the IRA continues, 

though. 

Mr. POMEROY. That has been the traditional incentive to those 

earning $50,000 or under. We added to that with a small credit. 

I want to give your staff just kudos for the efforts they made to get 

this credit online and operative. They have done a great job with 

that. That is going to be an even stronger tax incentive for modest 

incomes, and that goes away under the proposal as well. 

So, as I understand it, you can’t have a tax credit, you can’t have 

a tax deductible in terms of making savings contributions, but you 

allow them to save greater amounts in the future. 

Now, for the family that can’t save because they are very 

scrunched on disposable income, having higher limits where they 

can save tax free for the future, it really is not responsive to their 

problems, in my opinion. 

Chairman THOMAS. I thank the gentleman. The time of the 

gentleman has expired. 

Mr. POMEROY. May he have 30 seconds to respond? 

Chairman THOMAS. The gentleman’s time has expired. 

Mr. SNOW. The whole plan is designed to encourage savings, not 

discourage it. 

Chairman THOMAS. Does the gentleman from Arizona wish to 

inquire? 

Mr. HAYWORTH. Thank you, Mr. Chairman. Mr. Secretary, welcome. Day 2 on the job, hearing number one in front of the Committee on Ways and Means, and I am sure you would agree it has 

been a very interesting afternoon. 

On the one hand, some of my colleagues saw fit to lecture you 

about the fiscal policy of the United States. Some of them offer very 

interesting revisionist histories for us. I am indebted to my friend 

from Ohio for helping to set the record straight. Some assume a 

prosecutorial role, even asking what you said and where were you 

on February 28 in talking to what publication. 

Finally, to my friend from North Dakota, I would simply say, 

with Arizona State, the heart of the new Fifth Congressional District of Arizona, we welcome all those out-of-State students down 

to Arizona. 

Mr. POMEROY. It would be nice if they could deduct the tuition 

they pay when they come down there. 

Mr. HAYWORTH. Well, we look forward to working to continue 

that. Far be it for me to correct the Chairman, even to say I think 

that this will continue through the end of President Bush’s first 

term. So we have gotten that all straight. 

39

Let me view perspectively what is transpiring with what you call 

the centerpiece of your proposal, of the President’s proposal, and 

that is this bold stroke about dividends. 

It has been interesting at home because, as with most bold 

strokes, a lot of folks are very excited, some folks have questions. 

I was interested this morning to read on the op-ed page of my 

hometown newspaper a gentleman who opposed me in the last election embraced this wholeheartedly. So I thought that was good bipartisan support. However, perspectively, some questions do continue. 

There have been some questions raised that tax-exempt dividends received by shareholders will increase a shareholder’s AMT 

liability. Are excluded dividends subject to the alternative minimum tax? 

Mr. SNOW. No, they will not be. 

Mr. HAYWORTH. So, we can put that to rest right now? 

Mr. SNOW. That can be put to the side. 

Mr. HAYWORTH. Mr. Secretary, it is a challenge we all confront, and people of good will can bring different points of view to 

this endeavor. Rather than offering a lecture, I simply want to say 

we look forward to working with you in the days ahead and working with the Administration. While the President proposes and the 

Congress disposes, we think we will have a very productive time. 

So, with that, I thank you for your time and your indulgence this 

afternoon. I thank the Chair. 

Chairman THOMAS. Does the gentleman from Kentucky wish to 

inquire? 

Mr. LEWIS OF KENTUCKY. Yes. Thank you, Mr. Chairman. 

Mr. Secretary, we think and hope that the recession is over, but 

the unemployment rate is still high and the business investment 

is still weak. Do you think it will help the economy for a short-term 

boost or do you think it is more important to look at long-term relief, and how does the Administration proposal address this postrecession weakness in the economy? 

Mr. SNOW. The proposal does both, Congressman. I think it will 

be a good boost for the economy in the short-term in creating about 

500,000 additional jobs by the end of this year and well over 1 million by the end of next year. Its most important feature is probably 

it is just good economics. It makes the economy more efficient. 

Through the dividend proposal, it lowers the cost of equity, encourages the use of more equity, will lower debt equity ratios, will encourage companies to pay more dividends, will end the double taxation of corporate payouts and I think will have a very favorable 

effect on equity markets generally. 

It will also put more money in people’s pockets today, and it will 

put money in their pockets that they can count on. I think one 

thing that we know from economics is that there is a big difference 

between a temporary enhancement in your take-home pay and 

something you can count on for the long term. This they can count 

on year after year after year. That is going to change people’s attitudes today I think and make them much more willing to go out 

and spend and buy things, and that helps this circular flow around 

this economy. 

40

The expensing provision is going to help. Small business is the 

biggest generator of jobs. Small business comes out a big winner 

on this. Small business, through the expensing and through the reduction in the marginal rates, will find that small business becomes more profitable. It will have more free cash flow. As they 

have more free cash flow, they will put up more help wanted signs, 

and there will be more good jobs. 

That is what this is really about. In the longer term I am confident this will put us on a better growth path so we can meet 

these huge obligations we have talked about for the future and 

these unfunded promises of the future that loom over us. 

Mr. LEWIS OF KENTUCKY. What about our senior citizens? 

How does the President’s proposal help them meet the challenges 

of their retirement and investments that they have? 

Mr. SNOW. There are some 10 million seniors, I am told, some 

number like that, who are dividend recipients. Some, like my mother I mentioned earlier who is now deceased, she never had a lot 

of money, but that dividend was important to her. I think that will 

help older Americans considerably. It is surprising how many older 

Americans own stock and depend on dividends. So that provision 

will help them considerably. 

Mr. LEWIS OF KENTUCKY. Thank you. Very good. 

Mr. SNOW. Thank you. 

Chairman THOMAS. Thank you, Mr. Secretary. I do want to 

note that you have been in office 1 day, and I was disappointed 

that you were not able to answer every question, especially those 

about the future, because I thought we could have gotten a really 

good deal here if you could tell us what is going to happen. Unfortunately, the human condition is that we hopefully will plan as 

best we are able for the future in order to be prepared for tomorrow 

and the day after. 

I look ahead as we move forward in presenting the President’s 

bill that there will be representation from Treasury during the 

markup. As we have broad hearings, several days of hearings, I do 

suggest that it would be helpful if you at least follow closely the 

discussions that we will be having with people, those who are in 

support, and I assume, people who are in opposition or offer alternatives to the President’s position. 

Our job is to inform ourselves to the best of our ability to make 

the best decision as far as the Tax Code is concerned for the American people. I know you believe that is your responsibility as well, 

and this Committee looks forward to working with you in the near 

future, and, frankly, for your entire term as Secretary of the Treasury. 

Thank you very much for being with us today. 

Mr. SNOW. Thank you, Mr. Chairman. Let me say I intend to 

be fully engaged with you and your colleagues on this important 

work that lies ahead of us. 

Chairman THOMAS. I think you did a pretty good job for 1 day 

in office. There being no further business, the hearing is adjourned. 

[Whereupon, at 4:20 p.m., the hearing was adjourned.] 

[Questions submitted from Chairman Thomas to Mr. Snow, and 

his responses follow:]

41

QUESTION 1: Last year Treasury Under Secretary Gurule testified that 

‘‘transferring the U.S. Customs Service into the Department of Homeland 

Security will achieve the larger objectives of the President’s proposal by (1) 

ensuring the proper balance between security and trade facilitation, (2) 

limiting the size of the Federal Government, (3) ensuring accountability 

and coordinated policymaking, and (4) promoting the collection and analysis of all information related to homeland security.’’ Can you tell us how 

the transition will take place and what steps you will take to ensure that 

the transfer of the Customs Service to the new Department will achieve 

each of these goals?

ANSWER: Treasury and Homeland Security have been working together to ensure that these goals are met make the transfer as smooth as possible. We believe 

that providing all necessary operational authority to Customs and retaining policy 

direction at Treasury for revenue issues will strike the proper balance between security and trade facilitation, prevent growth of government. Having the data collection 

function under Customs control ensures that information will be used for both security and revenue purposes

QUESTION 2: In crafting the reorganization legislation, Congress left the 

organic authority for Customs within Treasury, creating a presumption 

that the authority should not be delegated. Does the Department of Treasury intend to delegate any specific authority or function to the Department 

of Homeland Security relating to the U.S. Customs Service? Will the Department of Treasury continue to perform its oversight role over Customs 

functions as it has always done, and if not, what changes are contemplated? Will the Department of Treasury remain fully staffed in order 

to continue to perform its oversight role? What office within the Department of Treasury will be charged with the oversight of the revenue collection functions of the Customs Service?

ANSWER: The Administration is working closely with your staff to craft the appropriate delegation of this authority. We want to ensure that Customs has all necessary authority for security issues and the operational and day-to day aspects of 

administering the revenue functions. Certainly these are important questions and 

we need to attend closely to the details of the issues.

QUESTION 3: Now that the Customs Service has been transferred to the 

new Department of Homeland Security what proposed budget changes 

have been made for all of Customs’ statutory functions that have been 

transmitted in the current budget? How will this Congress be able to verify 

the Administration’s commitment to Customs’ trade mission?

ANSWER: The President’s FY ’04 budget request details the proposed budgetary 

changes for all of Customs statutory functions. The Administration looks forward to 

working with Congress to ensure that the Nation’s interests in Customs trade mission are met.

QUESTION 4: How will the Treasury Department insure that Customs 

continue to be the lead office of the collection of trade data within the new 

Department of Homeland Security?

ANSWER: Under the existing statutory scheme the Customs Service collects import entries, from which the bulk of trade statistics are generated. The Department 

of Commerce and the International Trade Commission also have important roles in 

trade data collection, as do the Department of Transportation, and several other 

agencies, depending on the nature of the import. Ensuring collection of good statistics in a manner least burdensome to the public requires an integrated government 

effort, an effort that the Administration intends to maintain.

QUESTION 5: What will happen to the continuing development of the 

new Customs computer system, the Automated Commercial Environment 

(ACE), during the transition to the Department of Homeland Security? 

What steps will be needed to join the Customs computer system with that 

of the other agencies?

ANSWER: The President’s FY ’04 budget request includes continued funding for 

Customs’ new computer system, ACE, the Automated Commercial Environment. 

Part of the ACE project is the International Trade Data System or ITDS which links 

ACE to other agency computer systems.

QUESTION 6: The Trade and Development Act of 2000, which includes 

landmark reforms to improve trade relations with Africa and with countries in the Caribbean Basin region, was signed into law on May 18, 2000. 

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The Treasury Department has yet to issue final implementing regulations 

to guide U.S. businesses and trading partners who are attempting to do 

business under these new programs. Can you explain the delay and indicate whether the Committee should expect a similar performance with respect to implementing regulations for the Andean Trade Promotion and 

Drug Eradication Act, which was signed into law on August 6, 2002?

ANSWER: We expect that all three of these regulations to be issued in the very 

near future.

QUESTION 7: In the Homeland Security Act Congress directed that customs user fees should be strictly accounted for and used for the commercial purpose for which they are collected. I notice that in the new budget 

for Homeland Security there is no longer a function line showing money 

spent on commercial operations as in years past. What is the Administration doing to ensure a strict accountability of fees and that funding for 

commercial operations are not diminished?

ANSWER: The Treasury Department was not involved in the details of the budget 

for the Department of Homeland Security. Of course, user fees should be strictly accounted for and used only for the purposes established by law. The Administration 

is committed to ensuring that Customs commercial operations are fully funded in 

order to facilitate trade.

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